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To initially find out if you are eligible for a loan modification, refinance, or short sale, you need to contact the servicer of your loan. You can find the phone contact number on your billing statement. Contact the bank or servicer listed and ask for the servicer.
The Definition Of A Short Sale
A short sale is a pre-foreclosure real estate transaction where the lender or owner of a mortgage loan agrees to permit the homeowner to sell his or her house “short” of the amount owed to the bank, releasing the property from the financing. Therefore, a short sale does not refer to the time (which can be lengthy) of the transaction. It refers to the settlement.
A homeowner who is upside down or underwater with regards to his or her mortgage often seeks to sell his or her home “short” to stop foreclosure. Because of the “shortage,” this type of real estate transaction is equated with debt forgiveness.
This prevention method is often more attractive to a lender versus going through foreclosure, which has risks and costs attached to it in terms of lost payments, insurance, taxes, eviction, and similar charges. A loan modification also features a related lack of certainty. A short sale foregoes these additional charges and issues by taking the non-performing mortgage financing off a lender’s books.
What You Will Need To Initiate A Short Sale
A lender’s loss mitigation department is responsible for approving a short sale. Loss mitigation refers to finding a method to avoid foreclosure. To obtain approval for a short sale, you must contact the servicer of your loan and request a loss mitigation application. The loss mitigation application must be filled out in full and include the following:
· A financial statement in questionnaire form that features details about monthly costs and income.
· Proof of income, if it applies.
· Current or most recent tax returns
· To recent bank statements for all the accounts that you hold
· A hardship statement or affidavit
A short sale application usually requires that you add an offer from a potential buyer. A good many lenders require that they see an offer to buy before they consider a short sale transaction. If the property is attached to more than one mortgage, both mortgage holders must agree to the short sale.
The first mortgage holder will offer a specific amount from the proceeds of the short sale to the second mortgage holder. If the second mortgage holder refuses the offer, it will void the transaction.
Most homeowners who complete the short sale process will usually face a deficiency judgment. Because the sales price is “short,” of the entire debt, the difference between the debt and sales price is called a deficiency. C
California has legislation in place that prevents a deficiency judgment after the completion of a short sale. Therefore, a lender cannot go after a homeowner for a deficiency judgment after a short sale in California. You can find out more about the specifics when you consult with a foreclosure attorney.
A Precaution To Note – Short Sale Flipping Schemes
In some instances, unlicensed short sale representatives target homeowners whose homes are on the verge of foreclosure and convince the lender to accept lowball offers, frequently using straw buyers for this purpose. For example, a short sale representative contacts a distressed homeowner, telling him or her that they will facilitate the sale of their underwater real estate. Payments to the homeowner may be promised to lure them into an agreement.
The short sale representative or facilitator follows up by contacting a licensed real estate broker in California who has scant knowledge about short sale real estate transactions. The facilitator offers to refer the listing of the short sale to the broker.
The broker, in turn remits a referral fee to the facilitator. Once this happens, the facilitator presents the homeowner with an agreement, which allows the facilitator to act as the homeowner’s negotiator for the short sale transaction.
The Contract Language May Read As Follows:
“Seller agrees that he will not market the property and will grant [short sale negotiator/facilitator] the right to market, negotiate and enter into agreements to sell the real estate to a third party.”
For its services, the facilitator or short sale negotiator charges the homeowner and seller an upfront fee and another charge for negotiation services. In turn, the facilitator presents a low-ball offer to the lender by using the name of a straw person or fictitious buyer.
Because the facilitator has controlled the information given to the lender during the period for listing the property, the lender concludes that the offer he or she is given is the best offer and readily accepts it.
Following this acceptance, the facilitator focusses on finding a second and legitimate buyer for additional money via a “flip.” To realize this goal, the facilitator, through the straw buyer, offers the soon-to-be newly purchased real estate through the multiple listing service. The facilitator will also contact the buyers’ agents who presented higher offers during the short sale process – offers that were withheld by the facilitator/negotiator from the lender.
After the closing of the second sale, the scammer or “short sale negotiator” can make on average as much as $50,000 to $70,000, including the broker referral fees and the fees he or she received from the distressed seller and homeowner.
The “short sale negotiator” in this example engaged in fraudulent activities because he did so without a California real estate license. Collecting the advance fees is also a violation of California law. Making a large profit through false pretenses and misrepresenting the true value of a home constitutes a crime and is called federal loan fraud. This felony is punishable by both fines and imprisonment. Therefore, short sale flipping is considered real estate fraud by the FBI.
Offer The Lender A Deed Of Lieu Of Foreclosure
If you are struggling to make your mortgage payment and the lender will not accept a repayment plan, loan modification, or forbearance, you can opt for a deed in lieu of foreclosure. The first step for taking this initiative is to contact the lender or the servicer of the loan and ask for a loss mitigation application.
How To Facilitate A Deed In Lieu Of Foreclosure
The application must be filled out in full and submitted with the following paperwork or information:
· A financial statement in questionnaire form that offers details about expenses and monthly income.
· Proof of income, if it applies
· The current or most recent tax returns
· Two recent bank statements for all your accounts
· A hardship statement or affidavit
The lender may ask that you attempt to sell your home first before he or she accepts a deed in lieu of foreclosure. The copy of the listing agreement will show that you have already taken this type of action.
What You Need To Sign
If you are approved for this foreclosure prevention method, the lender will require that you sign certain documents. These documents include the following:
· A deed that transfers the ownership of the real estate to the lender
· An estoppel affidavit
· In some instances, a deed in lieu agreement may be included
The estoppel affidavit establishes the terms of the contract and will feature a provision that the homeowner is acting of his or her own free will. It might also contain a provision that states that the transaction covers the complete debt satisfactorily.
A deficiency in a deed in lieu of foreclosure agreement is the difference between the entire debt and the property’s fair market value. In most instances, completing a deed in lieu of foreclosure will release a borrower from all liability and obligations. California law protects homeowners from receiving a deficiency judgment from a lender, or seeking the difference of the fair market value and the amount owed. Nevertheless, you can still incur a tax liability for your forgiven debt.
Avoiding Deficiency Judgments
If you decide to sell your house in a foreclosure sale, but you still owe a balance, that balance is considered a deficiency. Even if your house sells for the exact amount owed, a lender could still claim that you are deficient. He may want money owed for the costs associated with foreclosure.
To collect any deficiency judgment, the lender or bank goes to court and sues the homeowner for the balance. If you are sued for this amount, you are ordered to pay the unpaid debt – a debt that is called a deficiency judgment
If you do not pay the amount, the lender can garnish your wages, garnish your checking or bank accounts, or apply a judgment lien again your personal property. You can avoid this process when you file for bankruptcy. While a Chapter 7 bankruptcy discharges the debt, a Chapter 13 bankruptcy permits you to repay the deficiency judgment over a period of time.
Income Tax Liability For Deficiencies
In some instances, a lender will forgive you for a deficiency on your mortgage balance. However, you may be asked to pay tax on the amount, as it is considered a gift. That is because you do not have to pay the money back. If you do face a tax liability of this type, you can avoid having to pay it through a bankruptcy filing or insolvency exclusion.
To use the insolvency exclusion, you need to demonstrate to the IRS that the liabilities owed surpassed the value of your assets when the debt was cancelled. Any cancelled debt is not included in a person’s income if he or she is insolvent.
Filing for bankruptcy can assist you in avoiding a tax liability because is discharged and therefore in not considered taxable income. To avoid the payment, you need to file for bankruptcy before the cancellation of the debt. This type of filing should only be undertaken if you feel that it makes sense.
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