Do you owe more than your house is worth? Avoid Foreclosure

DO YOU QUALIFY?

Qualifying for a Short Sale

Hard comparable sales must substantiate that the home is worth less than the unpaid balance due the lender.
The Mortgage is in or Near Default Status. (Many believe you can receive help without being behind on your mortgage... it is worth a try but MOST mortgage companies will not entertain a short sale unless you are in default.)
The Seller Has Fallen on Hard Times.
The seller must submit a letter of hardship that explains why the seller can not pay the difference due upon sale, including why the seller has or will stop making the monthly payments. (They DO NOT want medical details... Privacy is vital)
A few examples that do NOT constitute a hardship are:
Bad purchase decisions. Blowing your paycheck on a home theater system with surround sound does not qualify as a hardship.
Unhappy with the neighbors. Even if the neighbors are growing drugs, that will not qualify as a hardship. (Call your local law enforcement)
Buying another home. The lender will not care if you have decided the home is no longer suitable for you or your family.
Pregnancy. Increasing the size of your family or starting a family is not considered a hardship.
Moving into an apartment. If you decide to move out of your home, that is a lifestyle decision and not a very good reason to abandon your home.

Examples of hardship are:
Unemployment
Divorce
Medical emergency / sudden illness
Bankruptcy
Death

The lender will probably want to see a copy of the seller's tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the shortfall.
For example, if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. However, the lender might discount the amount the seller is required to pay back.
　
　
Short Sale Consequences
A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the property. It is also dependent on the lender accepting the buyer's offer. If the lender rejects the offer, a short sale will not take place.

Tax Consequences
If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007. You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.

Blemished Credit Report
A short sale will show up on your credit report. It's a pre-foreclosure that has been redeemed. Short sales do cause damage your credit. While the damage to your credit report may not seem as significantly bad as a foreclosure to you, creditors may not make the distinction. Some experts say the drop in your FICO score is as significant as a foreclosure reporting.

As a real estate agent, I am not licensed as a lawyer nor a CPA and cannot advise on those consequences. Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the I.R.S. could consider debt forgiveness as income. Also, there is no guarantee that a lender who accepts a short sale (Unless they agree in writing not to do so) will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether your loan qualifies for a deficiency judgment or claim.