Considering a Short Sale

5 Things Most People Don't Know about Short Sales

  1. Banks will accept less than you owe on the mortgage which is what a short sale is.
  2. Banks will put in writing that they will not come after you for the losses referred to as a deficiency judgment
  3. Banks will pay all the closing costs in most cases to include any real estate commissions, transfer taxes, hoa/condo fees, attorney / settlement agent fees, liens for taxes and water bills, and other liens on the home for example credit cards, etc (usually lien holders will have to accept a discount).
  4. Banks will often pay relocation assistance to sellers
  5. You Will typically be able to buy another home if you wish in 2 – 3 years from the sale of your short sale home.

Benefits of a Short Sale

Whether you should do a short sale or let the home go to foreclosure depends on several factors. While for some homeowners, it is easier to throw up your hands and let the bank take your home that might not be the wisest thing to do.

Top Short Sale Benefits

  1. The upside down house debt is erased in most cases. If you are selling because of a financial hardship, then the upside down house debt will be automatically erased in most cases. If your loan is owned or insured by the following agencies: Fannie Mae, Freddie Mac, FHA, USDA, and/or VA; their policies state that your short sale debt will be erased completely and they put that in writing.
  2. You are eligible to buy another home much sooner compared to a foreclosure. The most common loan programs, Fannie Mae and FHA, stipulate that you can buy another home under their programs in about 2 to 3 years.
  3. Short Sale is at NO Cost To You. That is right. A short sale costs you nothing. ALL the selling expenses are paid by your lender. That includes the title insurance, attorney fees, agent commissions, and back taxes.
  4. Your credit suffers much less much less damage. Many people think that a short sale will be the kiss of death to their credit. The opposite is true. That is the one big advantage of a short sale over a foreclosure. And your credit rebounds much more quickly with a short sale versus foreclosure. The other benefit is that you will have less debt. (More debt hurts your credit score.) You will have a lower debt to income ratio, which could actually boost your credit scores. Within a couple of years or less, your credit will be back to normal or even higher than before you short sold, and now you can even buy another home if you want.
  5. You can often rent a comparable house for less than your former mortgage payment. I often see homeowners rent larger, nicer homes for less money in the very same areas and neighborhoods they short sold in.
  6. You avoid the humiliation of a foreclosure. Neighbors know when foreclosure occurs. Not so with a short sale. With short sale, your listing looks like all the other normal seller listings in the neighborhood.
  7. You don't have to pay rent or make payments during the short sale process. Most short sales take 3 to 12 months to complete. Most people do not make mortgage payments during the short sale process (but do continue to live the house). You can use that savings of not having to make house payments or rent payments to relieve other financial pressures in your life.
  8. You will likely qualify for some type of cash at closing incentive. These cash incentives range from $2,000 to as high as $35,000 and are being paid by Lenders, the U.S. Treasury (HAFA), and FHA (HUD) to Short Sale your home (versus be foreclosed on). You can use this money you receive at closing for moving and relocation costs (or to just get back on your financial feet).

Other Short Sale Benefits

  • You are in control of the sale, not the bank.
  • You may sleep better at night knowing who is buying your home.
  • You will spare yourself the social stigma of the "F" word, foreclosure.
  • Contrary to popular belief, you can be current on your payments and still affect a short sale.
  • Your home sale will be handled like any other home sale.

Buying Again After a Short Sale

If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. Finding a lender who will fund that kind of loan is very difficult. If you are current on your mortgage, you can qualify for an FHA loan immediately as well, but lender requirements can be weird such as you have to move more than 600 miles away.

If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence. The wait for FHA is 3 years.

Buying Again After a Foreclosure

With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.

If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.

Effects on Credit After a Short Sale

A short sale may be considered to be a derogatory mark on your credit even though credit bureaus do not show the word “short sale” on your credit report. It may say “paid in full for less.

Homeowner Short Sale Frequently Asked Questions (FAQ's)

What is a short sale?

In its simplest form a Short Sale occurs when a lender sees that its position on an asset, (home loan) is about to go into default or already is in default due to non-payment of the debt by the home owner. When this happens the lender then has two options. One, to foreclose on the property and in today's market take a substantial loss. Or two, to allow the sale of the home for less than the amount owed on the note and minimize their losses.

Why would a lender do a Short Sale?

Lets face it the banks for the past 50 years have known that 5-10% of their borrowers will face a hardship (divorce, financial, loss of a job, unexpected medical condition, death, loss in income, job relocation, etc)

While most lenders will not be thrilled at the prospect of a short sale they are acutely aware that a foreclosure is usually a far more time consuming and costly option. In a real estate market where housing values are going down it is in the best interests of the lender to liquidate their problem loans as quickly as possible.

With a short sale a property can be sold and the loan taken off their books fairly quickly. If they pursue a foreclosure they run the risk of the process taking a substantial amount of time during which the value of the property is depreciating.

Also, buyers will tend to write low ball offers when they know that a bank or lending institution owns the property. The property will also be left vacant which can result in vandalism and deterioration. Some owners will even gut the house just before the foreclosure sale as a way to "get back" at the lender. This is illegal but nonetheless happens on occasion.

In addition the banks are not in the property management business. If they foreclose they will have to maintain the lawn, utilities, insurance. And in the end they will have to list the home and pay a commission anyway.

How does a homeowner know if they qualify for a short sale?

As the rate of defaulted loans continues to climb, the rules of the game are ever changing. When a homeowner decides to pursue a short sale for the liquidation of their property, a few hard and steadfast guidelines are present. One cannot hope to get a short sale of their property just because they decide to stop making their payments. Short Sales are designed to help people facing hardships, whether due to poor judgments with their finances or the cause of some unforeseen hardship like: loss of income due to death, divorce, illness, job relocation, loss of job, etc. The following is a list of basic requirements for your lender to consider a short sale.

  • Payment is delinquent. In the past lenders wouldn't even consider a short sale on a note that is current. Times are changing and some lenders are being proactive and allowing short sales on properties that are current, but exhibit proof that the loan will become delinquent very soon.
  • The value of the home is such that when the property is sold for fair market value, all the costs associated with the sale such as; closing cost, Realtor commissions, and full payoff of the note cannot be realized.
    • Example: Your home is valued at $300,000, you owe $300,000. By the time you sell the property for $300,000 the costs for closing and Realtor commissions will total somewhere around $30,000. In this scenario the lender would only receive the remaining $270,000 (not enough to cover the $300,000 balance owed)
  • A hardship must have occurred. The lender wants to see what changed in the homeowner's life that warrants the potential short sale. Homeowners wanting to quit making payments for other reasons won't qualify.

Why would a homeowner pursue a short sale vs. foreclosure?

The simple answer is credit rating and the ability to limit future judgments. Lets look at some of the differences in short sale vs. foreclosure from a homeowner's perspective.

Foreclosure:

  • Court Settlement can be high
  • Credit Ruined
  • Big Attorney Fees
  • No peace of mind
  • Hard to buy again within 10 years
  • Deficiency could result in civil lawsuit

Short Sale:

  • Negotiate the settlement
  • Credit bruised
  • No attorney fees
  • Seller has piece of mind
  • You can buy again within 2 years
  • Liens negotiated
  • Sellers can stay in the house longer
  • Zero money comes from the sellers pocket

As this illustration shows, doing a short sale keeps the homeowner in control and allows the process to be finalized without wondering what might pop up in the future. Another way to look at this is from the position of, what is there to lose in pursuing a short sale? The answer is nothing. If the sale cannot be obtained, the property will go to foreclosure. At least you have the peace of mind knowing you did everything possible to help the situation, rather than just sticking your head in the sand.

What Paperwork will I need in order to do a short sale?

The answer is you will be required to open up your life to a select few in order to get the short sale done. The lender requires proof that you the homeowner NEED a short sale. They will want to see the following:

  • Hardship letter
  • Financial sheet showing all income and outgoing payments
  • Last two months bank statements
  • Last months pay stubs
  • Last two years tax returns or W-2s

How much time before the lender forecloses and I have to move?

Typically the short sale process takes 90 days. In most cases once the bank receives the short sale paperwork they will slow down and in many cases even stop the foreclosure once they receive paperwork from us. At that point it normally takes 90 days for approval. We can work with you if you need more time.

What if I have 2 mortgages and or multiple Liens?

We often see this and we work with both banks on the short sale and any lien holders. Realize that any junior lien holders that means the 2nd mortgage and any 3rd mortgage or liens of credit or any other liens all are familiar with short sales and we work with each of them to get an agreeable settlement.

What If I can't pay the mortgage?

No problem if you can't pay the mortgage we recommend saving as much as you can for your eventual move. Most banks in a short sale scenario understand that you can't send payments.

What If I can pay the mortgage?

If you are in a position that you can pay your mortgage, that is ok. We process the paperwork and if the lender requires that you be behind in order to do a short sale that will be your choice. We see many cases where homeowners can pay the mortgage but upon their relocation or an upcoming event they anticipate they won't be able to. More and more lenders are allowing borrowers to be current while they evaluate the short sale. There is no cost to you to process a short sale with us and no adverse effect on your credit if you are paying your mortgage and requesting a short sale. The only time your credit is affected is if you don't pay your mortgage and or if the bank approves the short sale and you sell the home at the loss it well then appear on your credit report "Mortgage paid off for less than agreed".

Implications for the seller/homeowner

When the short sale is finalized there are two main concerns on the part of the homeowner. One is the amount of debt that was forgiven…what happens to it? Example: you owe $200,000 and you get the short sale done for $150,000, there is now a $50,000 deficiency. In the past, the lender issued the homeowner a 1099, meaning the homeowner would be taxed on the $50,000 as if it were income. In January the President signed into law the Mortgage Cancelation Debt Relief Act which negates any taxes owed on forgiven debt. http://www.irs.gov/individuals/article/0,,id=179414,00.html

This bill only applies to your primary residence, not second homes and investment properties. The next concern is the remaining deficiency ( the losses the bank takes) could be sought after by the lender in the form of a deficiency judgment. Most banks now put in writing they will waive the deficiency judgment. While the lender has the legal right to go after that money, many factors play a role in determining whether or not the lender pursues it. One is, if it's made part of the agreed upon short sale that any deficiencies will be waived then you are in the clear. In the event the lender won't agree to put it in writing that they waive their rights, most lenders won't pursue the deficiency judgments because the homeowner is insolvent anyway and the short sale wouldn't have been authorized in the first place.

How does the homeowner know who to trust when choosing someone to help them?

We get asked this a lot. We recommend that whomever you work with you ask for references, ask them to show you proof that they received short sale approvals, and it helps if they have helped hundreds of homeowners like we have, and if they are licensed like the staff that we have.

Deed in Lieu VS. Foreclosure

So your buddy's best friend tells you to just do a deed in lieu rather than a short sale. A deed in lieu of foreclosure is where the homeowner gives the deed back to the lender and walks away. No foreclosure right? Not exactly, when a deed in lieu is done your credit report will state; "Deed in Lieu." In creditor's eyes, it's no different than a foreclosure, you've walked away. Another misconception is that it's something you can just decide to do. It's not; the lender has to agree to it. A few reasons they won't agree is, there's no equity in the home for the lender to recoup all of their costs. They would rather have you sell it and do a short sale. If there's more than one mortgage encumbering the property the lender will not accept a deed in lieu. As you can see the deed in lieu really has no real benefits even if the lender does allow it.

IRS Debt Forgiveness

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news releaseC IR-2008-17.

The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, youBN may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the moneyB you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here's a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
  • Non-recourse loans: A non-recourse loan is a loan for which the lender's only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

These exceptions are discussed in detail in Publication 4681.

What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

Where can I get this form?
If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at IRS.gov, or call 866-333-5597. If you call to order, please allow 7-10 days for delivery.

How do I know or find out how much debt was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.

If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.

I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.

If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt?
Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was canceled in a title 11 bankruptcy case. An exclusion is also available for the cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a Midwestern disaster area. See Form 982 for details.

If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?
Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Will I receive notification of cancellation of debt from my lender?
Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.

What if I disagree with the amount in box 2?
Contact your lender to work out any discrepancies and have the lender issue a corrected Form 1099-C.

How do I report the forgiveness of debt that is excluded from gross income?
(1) Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.
(2) File Form 982 with your tax return.

My student loan was cancelled; will this result in taxable income?
In some cases, yes. Your student loan cancellation will not result in taxable income if you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation.

Are there other conditions I should know about to exclude the cancellation of student debt?
Yes, your student loan must have been made by:
(a) the federal government, or a state or local government or subdivision;
(b) a tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are considered public employees; or
(c) a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization.

Can I exclude cancellation of credit card debt?
In some cases, yes. Nonbusiness credit card debt cancellation can be excluded from income if the cancellation occurred in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See the examples in Publication 4681.

How do I know if I was insolvent?
You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.

How should I report the information and items needed to prove insolvency?
Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation. You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.

To claim this exclusion, you must attach Form 982 to your federal income tax return. Check box 1b on Form 982, and, on line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately prior to the cancellation. You must also reduce your tax attributes in Part II of Form 982.

My car was repossessed and I received a 1099-C; can I exclude this amount on my tax return?
Only if the cancellation happened in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See Publication 4681 for examples.

Are there any publications I can read for more information?
Yes.
(1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues.
(2) See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov.

Sample Hardship Letters

In the Short Sale Hardship Letter You Must:

  • State the legitimate, special circumstances which have caused you to fall behind on your house payments.
  • Explain your current situation and what you are doing to try and get back on your feet.
  • Don't make your situation worse, by complaining to them.
  • Be honest and represent the facts clearly.

Even if the hardship does not completely meet the criteria of a true hardship, the lender may approve the short sale because they believe that the property is going to go into foreclosure regardless.

NOTE: As you write the hardship letter, you need to accomplish two goals.

You MUST:
1) Provide as much written explanation of your hardship as possible. Be specific.
2) Convince the bank that you are unable to make any more payments

NOTE: As you write the hardship letter, you need to accomplish two goals.

You MUST:
1) Provide as much written explanation of your hardship as possible. Be specific.
2) Convince the bank that you are unable to make any more payments

The borrower should write the letter in their own words, but they need to make sure that there is a clear picture of their financial condition, and back up their claims to hardship with documentation, such as pay stubs, medical bills, job layoff letters and more. The numbers should clearly illustrate that the borrower is headed for foreclosure or bankruptcy. This will motivate the lender to cooperate.

Lenders are all about numbers, so the letter isn't a sob story about the borrower's difficulties. It should be a factual description of a financial situation that is leading up to a bankruptcy or a foreclosure on their home, or both. The lender must be convinced that their only other option is foreclosure, and then they can analyze the numbers to see if a short sale is a preferable alternative.

The short sale hardship letter can be typed or handwritten, but we have found that handwritten is most effective. It should contain some standard elements at the top of the letter including the name of the borrower(s), the date, the lender and the loan number. The end of the document should have the borrower's signature with the date, as well as the signature of any co-borrower. The length is not important so make it as long as needed to have the desired impact.

Sample Short Sale Hardship Letters

Name: (Your Name)
Address: (Your Address)
Lender Name: (Your Lender)
Loan #: (your Loan #)

To Whom It May Concern:

I am writing this letter to explain my unfortunate set of circumstances that have caused us to become delinquent on our mortgage. We have done everything in our power to make ends meet but unfortunately we have fallen short and would like you to consider working with us to modify our loan. Our number one goal is to keep our home and we would really appreciate the opportunity to do that.

The main reason that caused us to be late is (insert reason here and don't be too lengthy and long winded) Soon after being late and our income not being nearly enough, we had fallen further and further behind. Now, it's to the point where we cannot afford to pay what is owed to (lender). It is our full intention to pay what we owe. But at this time we have exhausted all of our income and resources so we are turning to you for help.

(The approximate date of hardship and we believe that our situation is Temporary or will be Permanent.)

Our situation has got better because (reason here) and we feel that a loan modification would benefit us both. We would appreciate if you can work with us to lower or delinquent amount owed and or payment so we can keep our home and also afford to make amends with your firm.

We truly hope that you will consider working with us and we are anxious to get this settled so we all can move on.

Sincerely and Respectfully,

Borrower's Signature
Date
Co-Borrower's Signature
Date

Example Hardship Letter for Short Sale

(Date)
(Lender Name)
(Loan number)
RE: Hardship Letter – Short Sale for (your address)

Dear Creditor:

Since last (month) I am experiencing financial difficulties due to (layoff, medical problem).

After having my current financial situation carefully analyzed, I have concluded that it is no longer possible to comply with the original terms of the agreement. I have no choice but ask you for your help on avoiding the foreclosure of my family's home.

Due to the dropping of home prices that have affect the entire country in the last year, I currently owe more on my mortgage than my home is actually worth.

Please consider allowing me into your Short Sale Program so that we can lower the price and sell the house quickly before it goes into foreclosure. This will allow me to settle my financial obligation to you and have a chance to get back on my feet, without having to file for bankruptcy.

Please understand that financial hardships can occur and many times it's not a choice. I deeply appreciate your help in this matter. If you have any questions, or need anything further from me, you can contact my Realtor.

I am enclosing my (last two months bank statements, last two year's federal tax returns, last two pay stubs for all working borrowers, and my last two year's W-2's .

I, (your name), state that the information provided above is true and correct to the best of my knowledge.

Sincerely,
(Home Owner Name)
(Address)
(Account number)

Example Hardship Letter For Short Sale

Lender Name
Loan Number
Today's Date

RE: Hardship Letter – Short Sale for _____________________ address

To whom it may concern:

I purchased my home at _____________ in ___________. At that time I was employed by _______and business was very good. My salary and the possibility of a promotion and raise made me sure that I could easily support my mortgage. Unfortunately, a downturn in the market caused my company to reduce its workforce and I was laid off.

After searching for a comparable job, I finally got a temporary position as an office assistant as I continuing seeking other work. I struggled for several months to make my mortgage payment, and was also hit with some medical payments that I did not expect (the COBRA payment was more than twice what I was paying when employed). I knew I would have to sell my home to protect my credit rating and possibly have enough cash left over for moving expenses and some savings. I recently put my home up for sale; however, there were several problems that I did not have enough money to fix, such as the broken fence in the back yard and some pretty severe leaks in the roof which indicated a new one was needed.

I really love my house, but I know that I cannot afford it. I am a single parent, working as a temporary employee with few benefits and no savings. My financial situation cannot sustain a home mortgage of nearly $2600 per month. I want to sell the home, avoid foreclosure and salvage my credit. I know that a foreclosure on my record will affect me for years to come. I would ask that you please assist me in avoiding this.

Please accept this offer as payment in full. My attorney has advised me to file bankruptcy, but I prefer to avoid further destruction of my credit. I respectfully request that this short sale be approved, otherwise, I will have no choice but to file bankruptcy for my own protection. I just want to move on and start over.

I deeply appreciate your help and understanding in this matter. If you have any questions, or need anything further from me, please contact my Realtor.

Sincerely, Home Owner Name Address and Contact Information

What is The Short Sale Process?

Following is a typical short sale process at the bank:

  • Bank acknowledges receipt of the file. This can take 10 to 30 days.
  • A negotiator is assigned. This can take 30 to 60 days.
  • A BPO/Appraisal is ordered. The bank often refuses to share the results of the BPO.
  • A second negotiator may be assigned. This can take another 30 days.
  • The file is sent for review or to the investor. This can take 10 to 30 days.
  • The bank may then request that all parties sign an Arm's-Length Affidavit.
  • The bank issues a short sale approval letter.
  • Go to Closing

What the bank considers a Hardship

Here is an example list of hardships that lenders consider during the loan workout process:

  • Adjustable Rate Mortgage Reset- Payment S**** (uncommon, but we will see more lenders accept this in the future)
  • Illness
  • Loss of Job
  • Reduced Income
  • Failed Business
  • Job Relocation
  • Death of Spouse or C0-Borrower
  • Death
  • Incarceration
  • Divorce
  • Marital Separation
  • Military Duty
  • Reduced Income
  • Medical Bills
  • Damage to Property (natural disaster or unnatural)
  • Other (Please Specify)