This is part 5 in our week long series on short sales.

Yesterday: Short Sale Candidates | Today: Short Sale Drawbacks

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We’ve been talking all week about short sales and hopefully it’s helped you become more educated on the subject as you weigh your options. It’s important in any discussion to also give you the less positive side and that’s today’s topic. Below are some drawbacks that you should consider. Keep in mind, though, that when you get into a difficult situation such as not being able to afford your home, every option will have consequences and programs such as loan modification and short sale are generally the best solutions available.

A hit to your credit. The short sale phenomenon is pretty new and it’s hard to say with certainty at this time what the actual hit to your credit score could be. It is widely accepted, though, that it is less damaging than if you were to foreclose. Therefore, you should expect a quicker credit repair with a short sale.

You lose your home. In a perfect world, you would keep your home. With a short sale, obviously, you will be selling it. That can be a tough and emotional realization. However, in a situation where you have to weigh negatives against positives and make a “best-case” choice, having your debt potentially forgiven and being rid of a payment you may not be able to afford may be a favorable outcome.

It takes time. You have to remember that “short” references the sale being done short of the home’s value and not the time it will take to finalize. The process with the lender can be difficult and lengthy. Finder a buyer is never guaranteed. You have to be patient.

There may be tax implications. The Mortgage Debt Relief Act of 2007 largely rendered the tax problem inconsequential. It used to be that forgiven debt could be taxed as income until this law was put into action. It’s still possible that there could be tax implications, so you may be wise to contact a tax professional regarding your situation.

This is part 4 in our week long series on short sales.

Yesterday: Don’t Walk Away | Today: Short Sale Candidates | Tomorrow: Short Sale Drawbacks

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Short sales are more popular than ever. One recent informal survey suggested that 18% of all listings are short sales. It’s a staggering number. So who are all these people with these listings and how did they qualify? Below are common characteristics of short sales candidates

• Home value has dropped. This is a classics short sale trait. The market has dropped off considerable and left thousands of homeowners with a mortgage debt that exceeds their home’s appraised value. It makes refinancing impossible and often times, a short sale is the best option if you just can’t keep the home.
• The mortgage has defaulted or will in the near future. While it’s more common to see a short sale approved when in default status, it’s becoming more common to see lenders approve a short sale earlier in the process to mitigation their future losses.
• The seller has a hardship. You’re much more likely to get approved for a short sale if you have a documented hardship of why you simply can’t afford to stay in the home and make payments. The hardship letter is an important document that should be carefully crafted. AMG can advise you of how to do this.
• Simply can’t afford the home. If it’s just not possible to afford the home even with a loan modification, a short sale is the right option. It’s unfortunate if this is the case as no one wants to lose their home, but at least with a short sale, you can limit your credit score damage and responsibly reach an agreement that gets you free and clear of the situation.

If any of the above characteristics fit your situation, you should at least have a conversation with a professional about your options. Time can become a real critical factor and you need to stay ahead of the problem in order to reach the best possible resolution.

This is part 3 in our week long series on short sales. Today’s entry focuses less on short sales and more on an option that some turn to as an alternative.

Yesterday: Tax Implications | Today: Don’t Walk Away | Tomorrow: Short Sale Candidates

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There’s a lot of talk about homeowners simply mailing in their keys and walking away from everything. There are many companies promoting walk away plans and sugarcoating them as if the effect on you will be minimal. In so many ways, walking away is just the wrong move to make.

• Your credit is significantly damaged. Lenders will look back about seven years at your credit history. Walking away will stay with you for a long period of time and dramatically affect your ability to own another home anytime soon.
• It will be quite some time before you can buy a home again. Mortgage giant Fannie Mae has publicly stated that they will not lend to anyone that walks away for five years and even then will require a 10% down payment and 680 FICO score. They will accept certain documented hardships that can lower the waiting period to three years.
• You have a responsibility to pursue an agreement. Your mortgage is a contract that you are supposed to honor. You should make every attempt to secure a loan modification or short sale agreement before giving up.
• Simply put, there are better options. Have you pursued loan modification? Have you considered a short sale? Why not? They are better on your credit and represent a responsible and ethical resolution.

Don’t be fooled by companies that promote walking away. So many of these businesses are making it sound like the perfect solution and trying to convince you the effect will be minimal. We encourage you to read the following two articles from the San Francisco Chronicle and NPR respectively. They have some valuable information about why you shouldn’t walk away and shed some light on companies that promote such an action.

Fannie warns homeowners who walk away
Why Not Just Walk Away from a Home?

This is part 2 in our week long series on short sales.

Yesterday: Short Sale Popularity | Today: Short Sale Tax Issues | Tomorrow: Don’t Walk Away

Note: The following does not constitute tax advice. It is only meant as an overview to give you a starting point to learn more. If you need tax advice pertaining to a short sale or other loss mitigation service, you should consult a tax professional.

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It wasn’t too long ago that a short sale meant a heavy tax burden. A homeowner would have their debt forgiven by the lender (good), but be on the hook for taxes on the thousands of dollars in forgiven debt (bad). The IRS was looking at it as if it was income - kind of hard to accept taxes on phantom income, right? This was hindering borrowers from getting the help they needed as they were simply creating another problem.

Fortunately, the Mortgage Forgiveness Debt Relief Act of 2007 was passed and forgiven debt became much less likely to be taxed. The enacted law is not permanent and only creates a three-year window beginning back on January 1, 2007 and ending December 31, 2009. It could potentially be extended if the need is still there.

With this hurdle cleared, a short sale makes a lot more sense for homeowners and the volume of activity has picked up tremendously. If you think you might need a short sale, consult a professional and find out if you qualify.

This is part 1 in our week-long short sale discussion.

Today: The popularity of short sales | Tomorrow: Bye, bye heavy tax burden, hello debt relief

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Short sales are becoming wildly popular as homeowners look for something to mitigate their losses. What is it that makes this such an attractive option?

The setup

When times were good in the early to mid 2000s, loans were increasingly easy to get. Lenders opened up programs that allowed borrowers to qualify for loans that equaled 100% of the value of the home. Believe it or not, there were even programs that allowed for loans to exceed the home’s appraised value. After all, a home can only appreciate in value, right? Eventually, the home would be worth more than the loan, so what’s the big deal? Top that with the fact that many of these loans were given to unqualified borrowers “stating” their income. What’s more, these loans were often done as three and five year adjustable rate mortgages. Done the right way, none of the above is inherently “evil,” but when given out like candy to everybody that asks, it can spell disaster.

The result

What do you get when you combine 100%, interest-only adjustable rate mortgages with a market that couldn’t hold up? A lot of upside down homeowners. A $300,000 home with a $300,000 loan that becomes a $250,000 home while a borrower makes interest only payments becomes a likely candidate for foreclosure, especially when the homeowner’s ARM expires and adjusts to a rate that makes the monthly payment hard to afford.

A Better Option

A short sale may not allow for you to keep your home, but it does mitigate your losses and provide a “best possible outcome” scenario. While data is still sparse, it’s widely recognized that a short sale is less damaging to your credit. It’s also common for the lender to forgive your debt that accrued from a loss in value. Perhaps the biggest boost to short sale popularity was the passing of the Mortgage Debt Relief Act which temporarily stopped the IRS from taxing forgiven debt. Wouldn’t you like to be off the hook for that mounting debt, not have to pay exorbitant taxes on it, and limit your credit damage?

Short sale are especially attractive to those that hold an investment property such as a rental or vacation home. When you watch that property lose value and it becomes an unnecessary burden, getting rid of it is ideal. Of course, selling it at a price you need to recoup your losses is impossible. By applying for a short sale, you could potentially drop the price to a reasonable level and not be on the hook for the difference between value and loan balance.

What’s happening in the current market

A recent informal poll of the National Association of Realtors suggested that 18% of all home sales were of the short sale variety. As previously mentioned, data is still pretty new in this arena, so there’s not a lot else to go on. Many lenders are reporting huge increases in short sale activity. It’ not uncommon to see reports of a lender doing more short sales in one month than they did in all of 2007.

We’re likely to continue seeing dramatic increases in short sales over the coming months. Don’t get the idea that it’s easy, though. Not everyone qualifies and lenders aren’t just stamping “approved” every time someone applies. Consult a professional for a consultation.

Tomorrow: A deeper look at how the Mortgage Debt Relief Act has affected short sale activity.

We’re going to take a look at the short sale market all next week. The program is growing rapidly as more and more people are finding it’s the best option they have with their property. We’ll take a look at everything from what a short sale is to the type of borrower that should consider a short sale. The lineup is below:

1. Monday - Why short sales are so popular
2. Tuesday - Is your short sale tax free?
3. Wednesday- Why you don’t have to walk away
4. Thursday - The typical short sale candidate
5. Friday - The negative side of the short sale

The Wall Street Journal published an article Tuesday detailing how a short sale can overcome financial hardship with a mortgage. The homeowners had a second home that became unaffordable and they stopped making mortgage payments. After negotiations with the lender, a short sale became an option. Eventually, they sold the home for less than what was owed and the lender forgave $16,450 in missed mortgage payments.

This is the advantage that a short sale presents and can be an especially attractive option when you’re looking to get rid of the home, but owe more than what you can sell it for. For this reason, short sales are skyrocketing in popularity and we’re sure to see more in the coming months.

The article can be read in its entirety at the wsj.com.