The Ins and Outs of Short Sales
In the recent past the Real Estate market across the country and in Las Vegas especially, has been flooded by distressed homes. This epidemic has driven the market to where we are today with home prices as low as they have been in over a decade and there is a whole lot of resale inventory out there on the market. In a foreclosure situation a bank would repossess a home after several delinquent payments by the homeowner and attempt to resell the house. For a long time foreclosure seemed to be the only option for homeowners who were struggling and incapable of making their mortgage payment. Earlier this year the government launched an alternative program to foreclosures known as the Home Affordable Foreclosure Alternatives, also known as HAFA.

This new program, which took effect on April 5, would allow the seller to complete a short sale on their home without any remaining personal liability from the first mortgage holder. In a short sale the seller would have to meet many eligibility requirements and would be given 120 days to sell his or her house. The 120 days may be extended up to 12 months.

Here are a few of the eligibility requirements that must be met in order to proceed with a HAFA short sale:

  • The property must be the principle residence
  • First lien originated before 2009
  • Mortgage payments delinquent or default is reasonably feasible
  • Unpaid principal balance no more than $729,750
  • Borrower’s total monthly payment exceeds 31 percent of gross income

Once you meet with your lender or loan servicer and determine that you are eligible to proceed with the short sale there will be several terms that you will need to agree to. The bank or loan servicer will determine a list price for your home. Acceptable closing costs, including real estate commission, will be stated in the short sale agreement. The transaction must be an “arm’s length transaction” in which both listing broker/agent and buyer must not be related or in a close personal or business relationship. Also the homeowner cannot stay in the home as a renter or buy back the home, and the buyer may not sell the home for 90 days after the close of escrow. If the homeowner is a real estate licensee no commission may be paid to the homeowner.

Often times in agreeing to the short sale contract you are not only agreeing to a short sale but also a deed-in-lieu if the short sale is not successful. Meaning if the house does not sell in the designated time period then the house will be repossessed as a foreclosure. Approval of short sale homes may take several months due to the fact that the loan servicer must approve the sales price of the house.

The amount forgiven on your mortgage will be reported to the Internal Revenue Service (IRS) and may be treated as income and may be taxable. The servicer will report to the credit reporting agencies that the mortgage was settled for less than full payment and there will be a negative impact on the homeowners credit score, though the impact is significantly less than if the home was to be foreclosed upon. The short sale program also provides financial incentives to the loan servicer, the investor, the seller and junior lienholders. Short sales are subject to a cancellation clause in which the seller may cancel without notice and without paying commission if the property is conveyed to a mortgage insurer or a mortgage holder. The seller will receive $3,000 for relocation expenses after the short sale is complete. The relocation expenses may also be taxable along with the amount forgiven on the mortgage.

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