NORTH IDAHO DIRECTORY.   AND VISITOR INFORMATION

Short Sale Information

When you find yourself behind, the very first thing to do is talk to your lender. A large number of people that lose their homes in a foreclosure never spoke to the lender about their hardship. Request a loan modification. Many banks will reduce your interest rates, extend the terms, or give you interest only loans to get you back on your feet.

I was turned down for a loan modification and my home is worth less than what I owe

A good option for you may be a short sale.

Will I have to pay federal taxes on the money my lender loses in the short sale? There are several different scenarios talk to a tax adviser about your particular situation. When you do a short sale, your lender is agreeing to settle the debt on the property for less than the amount they are owed. The IRS therefore allows them to write off this loss, which is why your lender will send you a 1099-C after the short sale. Mortgage Debt Relief and Emergency Economic Stabilization Act

Prior to the Mortgage Debt Relief and Emergency Economic Stabilization Act of being put into effect, money forgiven by a lender in a short sale was considered taxable income. In many circumstances, the new law no longer requires taxpayers to pay federal income tax on the forgiven debt, provided the property is their principal residence.
Taxpayers may exclude debt forgiven on their principal residence if the loan balance was less than $2 million. The limit is $1 million for a married person filing a separate return. The law applies to debt forgiven in 2007, 2008, and 2009, and the Economic Stabilization Act has extended this forgiveness through 2012. It includes debt reduced through mortgage restructuring, refinancing, home equity lines of credit, and short sales.

This only covers your first mortgage on your primary home. If you have a second mortgage or a home equity loan a short sale will have to be negotiated with that bank as well. (Even if the second loan is with the same bank as your 1st mortgage)
If you got a second mortgage and used the money to “substantially improve” your home, this may to be excluded from taxes on the short sale.

All other short sale scenarios – if you pulled cash out on your primary residence but spent it something other than upgrading your home or if you are doing a short sale on a second home or investment property – result in a taxable event unless you qualify for the “Insolvency” exclusion.

The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent. Insolvency means your debts (including your mortgage) exceed the value of all your assets. In other words, if, at the time of the short sale, you have more debt than you do money or assets, you are considered insolvent.

Many people who find themselves facing a short sale are in exactly this situation and are thus excluded from paying taxes on a short sale. We recommend you check with your CPA or accountant to help you figure out the best way to go.

So what is the process in a short sale

When I list your home for a short sale, I will have you fill out an Authorization to release information letter. This authorization lets me talk to your bank and negotiate your short sale.

Every bank is different. Some banks will order a Broker Price Opinion and then set a list price. Some banks do not set a price but will order a BPO to determine if the offer we bring in is acceptable

Every short sale will have a short sale package. Some banks want us to turn in all of the package except for the offer when we first list the property, some want to wait until the offer comes in.

Sample Short Sale Package (items may vary depending upon the lender):

• Cover Letter (I prepare)
• Authorization to Release Information (I have you fill out)
• Sellers Hardship Letter (I can help you prepare this)
• Seller's Financial information
• 2 years w2's
• 2 months pay stubs (some banks require 1 year)
• 2 months bank statements (some banks require 2 years)
• Supporting Hardship Info - HOA liens, medical/disability statements etc.
• Repair Estimate for the property
• Comparable sales for the property (I prepare)
• BPO (Broker Price Opinion)
• Real Estate sales and marketing history and absorption rate (I prepare)
• Contract
• HUD 1 Net Sheet (Title Company prepares)
• First mortgage holder may ask for a payoff amount from the 2nd
• Second mortgage holder may ask for a payoff amount from the 1st
• Lender may ask for an Initial Title Report (Title Company Prepares)
• FHA and VA may have their own forms and special requirements as well