DO MORTGAGE SHORT SALES REALLY WORK (ALSO SEE LEGAL IMPLICATIONS)
(HELP #12)
We sometimes hear people say how the short sale process isn’t worth the time and rarely works. That is not our overall experience and we have several practices to help ensure a successful short sale process.
First, we prescreen all short sale information. This means collecting and reviewing the homeowner financials (including Hardship Letter) so there are no surprises in the process (like $20,000 sitting in the homeowner’s bank account). This also includes going over ramifications of the short sale process with the homeowner (i.e. possibility of a 1099C, a soft note on the 2nd and that any liens on the property will need to be paid). For example, if a homeowner has a home equity line of credit the mortgage lender will most likely ask for a “soft note” (loan for a portion of the balance with easy terms) to proceed with the short sale (more in HELP #13). It’s a big help to know upfront if the homeowner absolutely refuses to comply with such a short sale condition.
Second, we consistently follow up and nudge the mortgage lender(s) to move forward for a successful short sale process. We know lenders move slow with short sales, but when we find a short sale package has “disappeared” we move quickly and replace whatever they lost in the process. Consistent follow up is important when the short sale process is not moving forward in a timely manner with the mortgage lender(s).
Utilizing these practices will guarantee a much higher short sale success rate. We can attest to that!
BEWARE OF THE NON-PURCHASE MONEY SECOND MORTGAGE
(HELP #13)
If you decide to pursue a real estate short sale, be aware of the "non-purchase money" 2nd mortgage. A non-purchase money mortgage is one used for more than the purchase of the house. For example, a HELOC ( home equity line of credit) is a non-purchase money second mortgage. A HELOC may have been used to consolidate debt, take a vacation, or buy a new boat/car. In other words, the mortgage loan was for more than the house. In contrast, a purchase money second mortgage was taken out at the time of purchase process and used exclusively to buy the house.
Lenders holding the note for a HELOC are less likely to let the homeowner walk from the short sale process without repaying a portion of the loan. They know the homeowner will still enjoy the benefits of their debt consolidation, vacation, or new boat/car long after they sell their home on a short sale. Therefore, they feel the homeowner should take more financial responsibility. How? By signing a promissory note for up to one half of the second mortgage. Many times these promissory notes will be "zero" interest loans for up to 15 years to help the homeowner complete the short sale process.
Here’s the real problem: if short sale homework is not done up front to determine the intentions of the non-purchase money second mortgage lender and homeowner, we could find a short sale buyer only to learn the second mortgage requires a large promissory note. If the homeowner refuses to sign it the second mortgage holder will not sign off on the short sale process and the house will go to the trustee's sale.
LEGAL IMPLICATIONS OF THE SHORT SALE PROCESS
(HELP #14)
Consult an attorney/accountant for longer-term effects before completing a mortgage short sale. Although we are experienced short sale experts, we are not qualified to give legal or tax help associated with the process.
The IRS formerly considered debt forgiveness as income. However, legislation (October 2007) has reversed that rule. Additionally, ARS 33-729 and ARS 33-814 protect a homeowner from a mortgage lender deficiency if:
- the property is less than 2.5 acres
- is a 1-2 unit dwelling (dwelling means someone lived in the property)
- “purchase money” was used in the mortgage process
- the property is sold at the trustee’s sale (A BIG REASON TO APPROVE A SHORT SALE because if the mortgage lender rejects the short sale they cannot collect a deficiency)
Additionally, the IRS will not collect the ‘forgiveness’ tax if ANY condition applies during the year the forgiveness occurred (The Mortgage Forgiveness Debt Relief Act and Debt Cancellation 2007):
- it was the homeowner's primary residence for two of the last five years and “purchase money” was used
- the homeowner can prove insolvency (more debt than assets)
- the homeowner completed bankruptcy (and debt was discharged)
* Home Sellers * -- see mortgage short sales we successfully sold
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