Bullhead City Real Estate Blog

For anyone contemplating selling their home as a Short Sale there are a number of questions needing answers before decisions are made. Following are just a few points to ponder, coupled with my recommendation that you seek appropriate counsel from qualified professionals such as your tax accountant or CPA and in some cases your attorney, and your REALTOR®.

Perhaps the first question to answer – Is your loan a “Recourse” or a “Non-Recourse” Loan? Typically loans taken for the original purchase of your home – called “Purchase Money Mortgages” – are “Non-Recourse” or “Anti-Deficiency” loans. In other words, in case of default by non-payment the lender’s only recourse is to foreclose and take possession of the property. They cannot seek a Personal Judgment against you for the shortfall between the mortgage balance and the amount they receive at a foreclosure sale or the amount they agree to take as a Short Sale settlement. However if you re-financed your home at any time for any reason your new loan is most likely NOT a “Non-Recourse” loan and the lender does have the right to seek a Personal Judgment against you in court to attach other assets and/or future earnings to recoup their losses. Whether the lender will seek recourse or not is impossible to predict but it is important to understand your position.

What Are The Tax Implications? Federal Tax rules have always considered debt that is cancelled or “forgiven” to be taxable income. The Mortgage Forgiveness Debt Relief Act of 2007 changes the IRS regulations for debt that is forgiven in 2007, 2008 & 2009 up to $2 Million for married persons filing joint returns for debt forgiven on a primary residence. There remains the possibility that capital gains tax may still apply to a short sale or even a foreclosure sale. The safest bet is to consult your tax advisor or attorney to fully understand what tax liability you may have.

How Do You Negotiate With The Lender? Every lender will have slightly different rules and standards of evaluation. Your first step will be to contact the lender’s Loss Mitigation department to learn exactly how to best proceed with their organization. Along the way be prepared to submit a Hardship Letter to explain how you got into the situation of not being able to afford the payments as well as proof of income and assets to establish your inability (versus unwillingness) to repay the debt. Most lenders will require copies of earnings statements, bank statements and a Comparative Market Analysis estimating the value of the home which your REALTOR® can prepare for you. Once you have established contact with the correct person in the lender’s office you should also submit an Authorization Letter so that your real estate agent and ultimately the escrow company agent will be able to communicate directly with the lender.

Patience Is A Critical Virtue! When you first contact the lender it may take hours and dozens of phone calls to reach the correct person to deal with. You will be asked to jump through a number of hoops, and will then only receive “preliminary” approval for a Short Sale. The lender will not commit with a final approval until such time as a buyer is found and a written purchase offer contract is submitted to the lender for review. Not everything will make sense along the way either – starting with the fact that most lenders will not even begin to entertain the idea of working out the problem until you miss a couple payments. And don’t be afraid to discuss your need to have unpaid debt cancelled. Sometimes even when the loan is a “non-recourse” loan the lender may try to get you to agree to repay that portion of the loan not covered in a sale. Whether the terms of the loan did or did not allow for such recourse it should be your position to negotiate cancellation to protect your other assets and future earnings.

As A Final Thought (That Maybe Should Be First) – Seek out a trusted advisor, friend or relative and re-assess your situation. Is there another way to solve the problem? Perhaps you can start by trying to re-negotiate the terms of your loan to be able to stay in your home. Try to think outside the box and find ways to reduce any other expenses and approach your lender with a plan to achieve affordable payments with an interest rate reduction or increase in amortized length of loan, or a combination of both. In the event of a Short Sale or Foreclosure there are no winners and you need to try to find a win-win scenario, especially if you would rather stay in your home than have to move. It seems to me that lenders will be open to discuss modifying the terms of your loan agreement to avoid taking a forced loss from a Short Sale or Foreclosure.