Mike Linkenauger Short Sale Specialist Network

How to Write a Short Sale Hardship Letter

You thought you’ve finally made the right call and made a major decision to take on a residential mortgage for a bigger deal; but then circumstances turn really ugly and you find yourself in the tightest position you can ever imagine, leaving you with a very limited number of options:

Option (a): You can sit back, do nothing and simply wait for the bank to proceed with a time-consuming, energy-draining, high-costing, and socially debilitating foreclosure of your residential property.

Option (b): Or you may consider resorting to a loan modification agreement with your lender. On the other hand, this may simply be a temporary fix, especially if you’re quite positive that you won’t be able to sustain (for long term) the payment of mortgages regardless of reduced interest rates or an extended term for the completion of payment.

Option (c): You can make a futile attempt to talk your lender into a strategic default, which is by no means better than loan modification in your lender’s point of view.

Option (d): Or you can choose to insist on a short sale instead, fending off an impending foreclosure and all the hassle that comes along with it, as well as releasing you from any leftover mortgage obligations.

As can clearly be seen, the apparently best option for you in squeezing out of this tight spot is option (d): pursuing a short sale.

However, convincing your lender to consent to a short sale can be a tough one. As a matter of legality, you will have to create an honest, compelling and document-backed hardship letter. The hardship letter is a staple requirement for the short sale package, and it is critical to get it written correctly. Here are some crucial points to consider before you go into the tricky business of writing an effective short sale hardship letter. Read on.

Basic Considerations before Writing a Short Sale Hardship Letter

Before anything else, you should know that aside from a well-written short sale hardship letter, the decision of your lender will also be positively influenced by the following conditions:

1. The market value of the property in question has dramatically plummeted.
2. You, the borrower, are experiencing a deep and potentially lasting financial crisis.
3. The residential mortgage agreement is impending default or foreclosure.

Furthermore, you must understand how banks and other lending companies assess financially uptight borrowers like yourself. Generally, your “hardship condition” will be carefully evaluated by your lender itself, so as to know for certain whether you deserve a short sale or not. Nevertheless, it would be of great help if you knew about specific situations which are considered as acceptable and justifiable ‘hardships’ as recognized by the US Department of Housing and Urban Development (HUD). Basically, HUD considers pleas for short sales under the following valid reasons:

• The principal mortgagor has died, or an immediate family member of his has died.
• The mortgagor is ill, or a family member is ill.
• Marital Problems
• Shortage of Income
• Unemployment
• Too many stressful obligations
• Failed attempts in selling property
• Relocation as demanded by your work/profession
• Inconveniences in the property, i.e. leaky roofs, construction proceedings and others
• Imprisonment
• Financial incapacity to pay rent
• Response to military call of duty
• Losses due to natural disasters, such as devastating hurricanes or tsunamis
• Energy-Environmental costs
• Servicing complaints
• A floating-rate mortgage adjustment
• Dispute in payment
• Imminent transfer of ownership
• Fraudulent encounters
• Reasonable abandonment of property in question

Aside from delving into your past and present financial situation, your lender is naturally bound to look ahead and gauge your future financial capacity, as well as the future market value of your property. Not only will your lender check if you’re truly bound for foreclosure and thus fit to plead for a short sale, it will also weigh which of the two is the lesser evil. Lucky
you! Generally, lenders accept that short sales make the best of the bad bargain. When asked to choose between a foreclosure and a short sale, the latter is the lesser evil.

Writing Your Short Sale Hardship Letter

A short sale hardship letter should generally include the following.

1. A legitimate statement of your particular tight situation that has prompted you to unintentionally miss regular mortgage payments. Please do draw a clear and honest representation of hardship facts, nothing more and nothing less. As part of your short sale package, you will of course be backing up your hardship letter with other documents proving your hardshiip such as:

• Pay stubs
• Medical bills
• Documents that prove dismissal from work
• Other pending utility bills
• As well as other important documentations demonstrating and proving your financial instability

Having these hard facts should serve as ample proof of hardship to make you look like a dead man walking into an inevitable foreclosure or bankruptcy. Upon reading these, your lender’s attention will definitely be caught and he will most likely be obliged to consider your plea for a short sale in lieu of a nasty foreclosure.

1. An honest and credible explanation of your present condition, specifying your efforts and actions to somehow find a solution to your financial quandary, and emphasizing your willingness to work things out for the benefit of both parties involved.

What’s most important is to point out that you are no longer financially capable of completing the remainder of the pending mortgage payments, and that a short sale is the best option so far as both you and the lender are concerned. In this letter, you should express due concern and effort to convince the lender to opt for a short sale instead of an ugly foreclosure.

A Final Tip

Never compose your letter as if you’re complaining. That will only make things worse than they already are. Make your short sale hardship letter sound like a plea and not a complaint. The way in which you compose your short sale hardship letter can either make or break your plans. Therefore, do follow the tips above and your chances of having a short sale approved are dramatically multiplied. It is always a good idea to choose a good Short Sale Realtor so that they can better assist you with proper content for your hardship letter and gather all the imperative paperwork needed to start your short sale!

New Data Collected Regarding Completed Foreclosures

ForeclosureRadar, which is a research and tracking firm, is noticing a decrease in the amount of completed foreclosures in four of the five states it oversees along the West Coast. The analysis range for ForeclosuresRadar is Arizona, California, Nevada, Oregon and Washington. The only place to see an increase in November for a foreclosure rise was Arizona; up 25% from October.

“It’s great to see the banks slow down foreclosures and evictions for the holidays,” said Sean O’Toole, CEO and founder of ForeclosureRadar. “We expect that the numbers will drop even further in December.” The ForeclosureRadar adds that it isn’t unusual to see foreclosures slow down for the holidays. Once January comes, things should be back to the way they were. In Nevada, Foreclosures were up +6.4% and Washington +5.0%. Notice of Trustee Sale filings, rose 34.7% from October to November in the State of California. ForeclosureRadar’s analysis shows an increase from filings by Bank of America by up to 52%, and Wells Fargo by 23%.

Third party sales are increased over the years across a majority of ForeclosureRadar’s coverage area. However, the largest increases in third party foreclosures were in Arizona and Nevada and 101.6%, and Washington, with 6.7% annual increase. "The industry has not yet returned to normal or necessary foreclosure activity levels, but progress is certainly being made," the Bank of America spokesperson said.

Allie Zehring

Source:dsnews

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Income Tax After A Short Sale

After a short sale, there is still one more type of paperwork that the seller has to accomplish and it pertains to income tax after a short sale. Ordinarily, a debt that has been forgiven is still treated as taxable income. However, because of the Mortgage Forgiveness Debt Relief Act of 2007, homeowners may qualify to exclude the forgiven debt from the net taxable income but what is considered as a forgiven debt and what makes a homeowner qualified for debt relief? It is important for a homeowner who just went through a short sale to fully understand the provisions under Mortgage Forgiveness Debt Relief Act of 2007 since not all types of debt forgiven can be excluded from the net taxable income. By doing so, a homeowner can avoid paying for unnecessary taxes or being penalized for excluding a taxable income. Here are the common questions that relate to income tax after a short sale.

What is forgiven debt?

A forgiven debt is an amount you owe your lender but have been waived usually as a result of a request backed by a very valid reason. In the case of a short sale, a forgiven debt is the difference between the selling price and the mortgage which the lender or bank has waived because of your valid hardship situation.

What is exclusion of forgiven debt or income?

Ordinarily, debt that has been waived by a lender is considered taxable since it constitutes as an income. If however, a forgiven debt like a waved debt in short sale qualifies for debt relief under the Mortgage Forgiveness Debt Relief Act of 2007, it is ‘excluded’ or not reported on the list of income when filing for the annual income tax after a short sale.

Does the Mortgage Forgiveness Debt Relief Act of 2007 cover all types of forgiven debt?

Not all types of forgiven debt relating to a mortgage qualify for debt relief and not all of the amount of the forgiven debt can be excluded as well. Under the act, only debt used to ‘acquire, construct and improve the principal residence’. The debt is properly termed as qualified principal residence indebtness. This also includes debts used to refinance debt used for the said purposes but should be secured by the principal/primary residence of the homeowner.

A homeowner can exclude forgiven debt up to $ 2 million.

Does the Mortgage Forgiveness Debt Relief Act of 2007 cover rental homes?

The act covers for principal homes only; thus, forgiven debt relating to a short sale of rental or vacation homes do not qualify for exclusion. As a homeowner may live in different homes throughout the year, only the home where he or she spends time most is considered a principal home. In preparing income tax after a short sale, the homeowner must submit proof that the said property was his/her principal residence.

The principal residence must also be occupied by the homeowner until the short sale was completed. So if a homeowner had moved out of the home when a foreclosure was seen to happen. But then before the foreclosure was enforced he managed to get approved for a short sale, the forgiven debt would not qualify as an exclusion from income tax after a short sale.

How do homeowners know the exact amount of forgiven debt?

The amount of the forgiven debt will come from the lender or bank and will be written on a Form 1099-C Cancellation of Debt. This form includes the creditor’s name and identification number, debtor’s name, amount of debt cancelled interest if included in the debt cancelled; fair market value of said property, and the date the debt was cancelled. If a homeowner does not receive the form by February 2, it should be followed up with the lender in order to appropriately file exclusion from income tax after a short sale. Homeowners should also verify the amount on the form and if any discrepancy is seen, he or she should contact the lender. The amount of short sale deficiency should be at least $600 or more; otherwise, it does not qualify as indebtedness income.

How does a homeowner report the exclusion from income?

After receiving the Form 1099-C Cancellation of Debt from the lender, the homeowner should report the same amount on Form 982-Reduction of Tax attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). The homeowner should check the appropriate box on Part 1 –General Information where circumstances leading to the exclusion are itemized. In the case of a short sale, qualified principal residence indebtedness should be ticked. Additionally, the same amount that appears on the 1099-C Form should be reported on box 2 of Form 982.

Are there any other circumstances a homeowner can claim exclusion if the forgiven debt does not qualify under qualified principal residence indebtedness?

Under Form 982-Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), exclusion from the forgiven or cancelled debt may include those resulting from a bankruptcy, non-recourse loans, insolvency and farm debts.

If you are a homeowner who is in the process of a short sale in order to avoid a foreclosure, the IRS encourages seeking professional advice especially on whether you will qualify for exclusion of a certain amount on your income tax after a short sale. This should avoid paying for non-due taxes or getting penalized for not paying taxes on a wrongly assumed exclusion. To better assist you in any questions you may have, please, contact a Short Sale Specialist now and call (877)737-4903