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What Can I expect from a Real Estate Short Sale?

A short sale is a device used by lenders and borrowers to avoid a foreclosure action. The mortgage is in default for a while, and the bank realizes that the borrower cannot pay. The borrower finds a purchaser, but either the market value has gone down, or for whatever reason, the borrower finds a new buyer who wishes to pay less than the mortgage due.

The bank will require documentation, including an income and expense statement from the borrower, a hardship letter, the contract of sale, and a proposed HUD-1 Settlement Statement showing all expenses of sale. Each bank has their own requirements, and it usually takes approximately four to six weeks to review the package when received. You may feel that you are in limbo, but eventually you should have a person assigned to the case who will negotiate with you. There should be one person, either a lawyer or real estate broker, designated to deal with the bank on behalf of the seller. Persistence in contacting the bank is a must to ultimately obtain permission. It is not unusual for the bank to request the same documents on numerous occasions, stating that they never initially received them.

If the amount offered is approved, the closing can take place, and the borrower provides a letter from the bank to the title company showing approval of the short sale. The borrower should also make sure that he is released from personal liability on the note for the shortfall after the short sale is approved.

If the Short Sale is qualified under the Home Affordable Foreclosure Alternatives Program (HAFA ), the seller will receive $3,000 at closing towards moving costs.

One consideration in a short sale is whether there will be income tax due on the forgiven amount, and a tax advisor must be consulted before the short sale to resolve this issue. The Mortgage Forgiveness Debt Relief Act of 2007, has provided some exemptions to this tax, but a tax advisor must be consulted to determine if your particular loan qualifies for any of these exemptions. Don't assume that if the home is your principal residence, that you automatically qualify. For example, if some of the debt is a refinance where the money was used to purchase items such as cars or other non-house improvement related items, the forgiven debt would be taxable.

Another option to avoid a foreclosure is called a Deed in Lieu of Foreclosure, where a deed is given directly to the lender. The lender will most likely require that your home have been on the MLS for at least three months before they will consider this option. You need to make sure that you will not be held liable for the shortfall after the bank sells the property. As always, check with a tax advisor as to any tax ramifications.

Cynthia M. Burke practices Real Estate, Divorce, Litigation and Bankruptcy Law in the Counties of Nassau, Suffolk, Westchester, and all Boroughs of New York City.

Categories: Real Estate Law

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