There are many ways to lose a home but signing away ownership in a manner that destroys credit, embarrasses family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of these options is called a “short sale”.
When lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales.
If you are considering a short sale, I suggest that you obtain legal advice from a competent real estate lawyer and call an accountant to discuss short sale tax ramifications. Be aware the IRS will consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid.
Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following will give you a pretty good idea of what to expect.
Call the Lender. You may need to make several calls before you find the person responsible for handling short sales. You do not want to talk to the “real estate short sale” department “work out” department; you want the name of the individual capable of making a decision.
Hardship Letter. This is a letter to the lender describing how you got into this financial bind and making a plea to accept less than full payment. Lenders are not inhumane and can understand if someone lost their job, was hospitalized or had a devastating family situation. However, they are not particularly empathetic to situations involving dishonesty or plain negligence.
Proof of Income and Assets. It is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds or anything of tangible value. Lenders are not in the charity business and require assurance that the homeowner cannot pay back any of the debt that is being forgiven.
Comparative Market Analysis. Sometimes markets decline and property values fall. If this is part of the reason that you are unable to pay your mortgage, contact an experienced and reputable real estate agent to prepare a CMA.