Understanding Short Sales in Connecticut
What is a Short Sale?
A Short Sale is when your mortgage lender agrees to accept a payment of less than you owe on your mortgage to allow you to sell your home. In today’s market, there are many homeowners that owe more on their mortgages than their homes are worth (or will not net from their closings enough to pay their mortgages off). In those situations, if the homeowner does not have enough money to pay the short fall, a short sale may be a very important tool.
If the mortgage lender accepts less than is owed on the mortgage to allow a sale to go through, what happens to the difference?
The goal of short sale negotiation is for your mortgage lender to agree to forgive the short fall so that the remaining balance due to the mortgage lender is forgiven. Though this is not always the case, this goal is often realized. In fact, under certain government sponsored programs, debt forgiveness if you required.
Will there be any income tax consequences if the bank forgives the balance of my mortgage?
The facts of each situation are different. During the short sale process you should consult an accountant for a definitive answer. However, in many cases if the property is your primary residence or if you have more debt than you have assets before the property you are short selling is sold, there will not be any income tax ramifications relative to the forgiveness of debt.
Note that the Mortgage Debt Relief Act of 2007 which allows for the forgiveness of debt without income taxation on primary residence mortgages in certain circumstances applies through 2012 up to a maximum of 2 million dollars of forgiven debt, per married couple, 1 million dollars for a single person.
Why don’t I just let the bank take my property in foreclosure?
Connecticut is a deficiency judgment state. What this means is that if you are in foreclosure and owe more than the appraised value of the house, the foreclosing bank may move for a Deficiency Judgment.
If the Court orders the same, the bank will have a judgment against you for the difference between what you owe and the appraised value of the property. Once ordered, this judgment is valid for years and will impede your ability to improve your credit as long as it exists and remains unpaid.
In addition, with this judgment there is the potential of monthly payments being required, your wages being attached or your real or personal property being attached. If you can avoid a deficiency judgment, you want to. Further, most experts believe that a foreclosure has a greater impact on your credit than a short sale.
In addition, most institutional lending guidelines allow you to seek a mortgage sooner after a short sale, than after a foreclosure. In a nut shell, your future credit and your ability to obtain a mortgage may both be positively impacted by a short sale versus a foreclosure.
What does my future hold if I participate in a short sale?
If your short sale is successful and the bank forgives your remaining mortgage debt, the process of repairing your credit can begin. By repairing your credit and by having a short sale instead of a bankruptcy or foreclosure on your credit, you will be able to purchase another home sooner, as long as you take steps to improve your credit and pay any other debt that you have after the short sale closes. Most people rent for a period of time while their credit is being repaired and they are qualified to own a home again.
How do I determine whether I am a short sale candidate?
We work with Attorneys who practice real estate law and have in-depth knowledge of short sale transactions. We would be happy to refer you to an attorney we have worked with for a free consultation so you can know if you are short sale candidate.
How does the short sale process work?
The short sale process varies from bank to bank. With the assistance of a qualified professional, you will submit budget information, income information, bank statements, tax returns, a hardship letter, authorizations and the bank’s short sale application to the bank (along with any other required documents).
The items are reviewed by the bank, and typically a negotiator is assigned. After your advocate negotiates with your lender, if the short sale is approved, you have a closing of your home. In a traditional closing, the bank issues a payoff letter for the amount due on your mortgage and the same is paid at closing. The short sale approval letter acts as the payoff letter in a short sale, and the bank is agrees to accept less than it is owed so that your closing can take place.