As home prices have dropped in some areas of the country, a growing number of homeowners are finding their home is worth less than the mortgage amount still owed to their lender (known as being "upside down" in their mortgage). Owners may find themselves in this situation because they purchased their home at the peak of the local market, just before prices began to drop. Or, using an interest-only or payment-option loan, their monthly payments did not reduce the principal owed--and the home's value dropped. Some tapped too much home equity through second loans or lines of credit, even as much as 125% of the home's value.

Those "upside down" mortgage holders who can still make their monthly mortgage payments are safe if they don't need to move. They can wait out the market--perhaps even benefiting from lower property taxes from a lowered tax assessment--until the correction is complete and home prices again begin to appreciate.

Others, however, find themselves caught by escalating mortgage payments and other household expenses they can no longer afford. Although some borrowers can negotiate "workouts" and "loan modifications" with their lenders, others don't have those options. The only choice left to avoid foreclosure is a "short sale"--where the lender agrees to accept, as fulfillment of the borrower's obligation, a sales price lower than the amount still owed on the mortgage.

If you find yourself in this situation, or you know someone who is, here are five critical factors every short-sale seller must know.

• Short Sale Beats Foreclosure On Credit Report
  A foreclosure is a court settlement process involving legal action and possible attorney fees. A short sale, on the other hand, is a negotiated settlement with the lender--no attorneys required. Both show up on the borrower's credit profile, but the difference between a foreclosure and a short sale is the difference between broken credit and badly dented credit. The "short sale" consumer has better options sooner in terms of buying another home, qualifying for loans or credit cards, securing reasonable interest rates, finding rental housing, even applying for insurance.
• Often Lenders Prefer Short Sales To Foreclosure
  Foreclosing is an expensive, time-consuming process for lenders (costing an average $50,000 per property, according to a 2007 report by the Joint Economic Committee of Congress). In a foreclosure, the lender sells the property at auction--which may also result in lower net than the outstanding mortgage--or repossesses and sells the property as "lender owned" real estate, which is a "non-performing asset" that negatively impacts the lender's ability to make loans. In short, lenders want your money not your home.
• You Need An Offer To Get Short-Sale Approval
  Lenders generally do not "pre-approve" borrowers to conduct a short sale. Instead, the seller-borrower finds a buyer, who makes an offer that is presented as part of a short-sale package for the lender's consideration. The package will include information such as the purchase contract, an estimate of the net from sale, a complete seller's financial disclosure and a hardship letter stating why the seller can no longer make payments. The lender often requires other information as well. If the lender is open to a short sale, their loss mitigation department orders a Broker's Price Opinion (BPO), asking a knowledgeable real estate professional to render an opinion on the market value of the property (by looking at sold prices of comparable properties, the cost of making repairs and any other factors that might impact the property's value).  Assuming everything is to the lender's satisfaction, if the buyer's offer meets or exceeds the BPO, chances are the lender will accept the short-sale offer and "forgive" the difference between the offer and the outstanding mortgage.
• New Law Waives Income Tax On Forgiven Debt
  Until recently, mortgage debt forgiven by a lender was considered to be part of the borrower's taxable income, meaning the taxpayer would have to pay income taxes on the forgiven amount. That rule has changed: On December 20, 2007 President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007, which excludes forgiven mortgage debt from taxation. The exclusion only applies to a taxpayer's principal residence and to indebtedness forgiven between January 1, 2007 and January 1, 2010. The excludable amount of debt is limited to $2 million. Other restrictions apply; consult a knowledgeable tax professional for all the details.
• Short-Sale Process Requires Professional Help
  Conducting a short sale is not a simple process, as it requires negotiations with the lender (often more than one lender is involved) as well as the buyer, who may not understand the unique intricacies of the process. That's where our expertise becomes essential. We understand the complexities and critical timing of short-sale procedures and can guide you--whether you want to sell your property as a short sale or you're interested in purchasing a short sale. Please feel free to give us a call for more information. We'll be happy to discuss all your options!

Are you or do you know someone that is interested in buying a short sale?

A big part of our job is matching sellers with buyers. Be sure to call us if you're looking to buy a short-sale home!  Rob Kittle Team, 970-690-4920 or visit us at www.RobKittle.com. 

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