Selling a home for market value and having the lender take less than is owed is called a "Short Pay" or "Short Sale". Although each lender handles them a little different the process is very similar with all lenders. In a short sale the borrower markets the property and obtains an offer at current market value. The lender agrees to take the net proceeds after deducting the normal costs of sale, including real estate commissions, even if it is less than is owed on the property.
Typical Rules to Qualify for a Short Sale
The borrower must be at least 30 days late making their scheduled payments. Several Lenders have now changed this to 60 days late.
The borrower must demonstrate a hardship. Hardships include, divorce, change of job, change of income, change of family size, job transfer, recent medical bills. (Bank of America is testing a pilot program in which the borrower does not have to provide any documents and can be paid up to $2,500 as long as the bank gets the net proceeds they have predetermined by appraisal).
The property must be sold for current market value. The lender will get an appraisal and have local Brokers provide a price opinion.
The property can't be sold to an immediate family member or controlled business interest. It must be an "arms length" transaction.
The borrower must maintain the property until the close of escrow.
A short sale can have tax implications. The lender may give you a 1099 for the difference between what was owed and what the lender received. For example, if you owe $210,000 and the net proceeds from the sale are $170,000 you may have to report $40,000 in income on your state and federal tax returns. IRS tax code says that if the borrower is insolvent at the time of sale that they do not have to report the income. The Mortgage and Debt Relief Act of 2007, signed in December of 2007, generally allows the short sale of your principal residence without tax consequences as long as the total value is under $2 million dollars. If the loan is a purchase money loan for residential property and therefore non-recourse IRS Revenue Code states that in short sale you report the sales price as the amount owed, not the amount the lender realized and therefore generally would not have to report the amount on the 1099 as ordinary income.
In California two new laws, SB 931 which took effect on January 1, 2011 and SB 438 which took effect on July 15, 2011 do not allow a lender to obtain a deficiency judgement on residential property if they particiapted in a short sale. They further prohibit the lender from requiring additional payments or notes from the seller as a condition of approving the short sale. They must accept the proceeds from the short sale as payment in full for the debt owed.
If you would like a free consultation regarding the value of your property and whether or not you are a candidate for a short sale, refinance or traditional sale contact Realty Stars for a no obligation appointment. 559-732-4444