While a short sale may be a last resort for many homeowners facing foreclosure, it also represents a great opportunity for potential home buyers and real estate investors. This article is designed to help answer a few basic questions about the substantial risk and reward involved in this extremely complex and often drawn out process.

A short sale is a legally-binding agreement to allow a home to be sold for less than the amount that is owed. And, while short sales are not by any means common or easy, because of increasing inventory levels and foreclosures in some parts of the country, lenders are much more eager to negotiate with borrowers who are having trouble paying their mortgages.

For potential home buyers and real estate investors, a short sale also offers a great opportunity to purchase property at a significant discount. However, don't expect a lot of help from the lender without first providing a sales contract from a qualified buyer and all the information required by the lender's loss mitigation department. Of course, lenders are not looking to bail out "flippers" or other borrowers who simply overextended themselves. In most cases, a borrower must have suffered a serious financial hardship that directly caused him or her to default on the mortgage: the loss of a job, a serious illness, or the death of a loved one.

A written declaration and supporting documentation demonstrating financial hardship will definitely be required by the lender. This may include pay stubs, tax returns, and liquid asset statements, among other documentation.

It's important to note that the difference between what is owed on a mortgage and the final amount the lender collects after the costs of the sale, including real estate commissions and possibly other charges don't simply disappear in a short sale. In the past, this deficiency or "canceled mortgage debt" was considered taxable income to the borrower. However, thanks to the Mortgage Forgiveness Act of 2007, the tax burden for qualifying canceled mortgage debt (as high as 35%) for primary residences only has been temporarily waived until the end of 2009. If there are multiple liens against the property, all lien holders will have to be involved in the negotiation process, not just the first lien holder. Therefore, communication and patience are essential components of any short sale. This is why an experienced real estate agent and mortgage professional become so valuable to this process.

Call me if you would like to discus this further.

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Avoiding Foreclosure

Keep you home

Few things are as devastating as losing your home. Sadly, it's not always inevitable. In many cases the foreclosure could've been avoided with some outside help, it can be avoided. First, know that there are some of the hidden difficulties that will arise if foreclosure occurs. 

Finding a new home. It will not be better to let the foreclosure happen, because after you lose your home, you will still need to find a new place to live. All too often, the price you will need to pay in rent will be almost as high as your current mortgage payment. Remember: The owner of the property needs to make his mortgage payment, too, so they are going to charge a rental payment that's close to or higher than their mortgage costs. 

Deficiency judgment. It's not uncommon that the sale of the home is insufficient to cover the remainder of the mortgage. When the property has been damaged, or market values have dropped, the owner may end up with a bill in the tens of thousands for the difference. Despite what many people think, most lending institutions are not anxious to foreclose. It's a last-ditch effort to recover their money and minimize their losses, and it's an incredible hassle. Most lenders would rather avoid it, if possible. There are multiple sources for help that you should be aware of, and most lenders will be happy to hear that their clients are going to try to keep their home rather than just await a foreclosure. 

Housing Counseling Agency. The US Department of Housing and Urban Development maintains a list of HUD-approved counseling agencies. Have your client call (800) 569-4287 to find the agency nearest them. 

FHA-Insurance fund. FHA borrowers may qualify to have HUD make a one-time payment to bring their mortgage current. See www.hud.gov/foreclosure for more information on the requirements to qualify. 

Different mortgage program. Talk to a loan officer about the possibility of refinancing your mortgage to a more affordable program. 

Special Forbearance. Many borrowers can qualify for a new payment structure if they've had an increase in their cost-of-living, such as unexpected medical expenses, or a decrease in wages. This payment structure will allow the owner to repay the lender in a given time frame.

Call me if you would like to discus this further.