Foreclosure Strategies For Homeowners Part 2: Short Sale
Financial hardship can hit just about anyone. Where a hardship has permanently decreased a household’s income and the mortgage is no longer affordable, then selling the house can be the best strategy. When the mortgage debt is greater than the value of the house, then the mortgage company has to approve the sale in what is known as a short-sale. A foreclosure can destroy your credit for years, where a short-sale can preserve some of your credit and allow you to re-build credit much faster.A short sale is when the mortgage company accepts proceeds from a sale of the property that is short of the full payoff of the mortgage. The mortgage company will then forgive the remaining debt. For example, if you owe $200,000 on your mortgage, but you can only get $180,000 for the house, then you need to complete a short-sale and get that remaining $20,000 debt forgiven.
The application for a short-sale is the same as a loan modification. These applications go by several names, but the application is often called a ‘Request for Mortgage Assistance’ or ‘Application for Loss Mitigation.’ To get started, call your mortgage company and ask for these application papers.
Another requirement is the sale has to be an ‘arms-length’ transaction. That means you must sell to an uninterested third-party. Mortgage companies require this to ensure they are receiving the best price. If you want any of your debt forgiven, then you need play by their rules. The mortgage company will not allow a short-sale to anyone already living in the house.
Always engage a real estate broker to help with the sale. The broker will work to ensure you receive the best price. They also produce the purchase and sale contract and should attach a short-sale addendum to that contract. The mortgage company will likely require the addendum. The contract will then have to be approved by your attorney and the attorney for the buyer.
Under New York State and Federal regulations, a mortgage company must put a foreclosure on hold while they engage in loss mitigation with the borrower. This protection is triggered when the mortgage company receives a complete application. Follow up regularly with your mortgage company to make sure they have all the papers they need from you to process your short-sale. Once they acknowledge they have everything, then the foreclosure must be put on hold pending determination of your application.
One more professional should be consulted and that is an accountant. Debt forgiveness is considered income by the IRS. The law provides some exceptions, and you should engage an accountant or other tax professional to assess your potential tax liability from the short-sale or claim the exemption to not pay the tax.
Trying to complete a short-sale while a foreclosure is moving through the Court can be very frustrating. An experienced attorney can handle both the foreclosure defense and short-sale. Trying to accomplish all of this on your own can be too risky. Call Webster & Dubs, P.C. now for help, 854-2050.
About the author: Daniel Webster is a partner in the law firm Webster & Dubs, P.C. in Buffalo, NY. His law practice has focused on foreclosure defense and prevention since 2009. Other areas of practice include real estate, elder law, wills, trusts, and estates. Mr. Webster was previously a staff attorney at the Center for Elder Law & Justice in Buffalo. He went to college at Hamilton College, and graduated from the University at Buffalo Law School in 2008. He is also the President of the Board of the Buffalo Cooperative Federal Credit Union.