Someone called me the other day with a question about short sales and HOA fees. She wanted to know whether a homeowner should continue to pay HOA fees if they are involved in short selling their home, and are awaiting lender approval. The answer is YES.

Unlike other fees which short sale lenders typically agree to pay (such as county transfer fees and certain document fees, escrow and title fees, etc.), lenders normally will NOT pay late HOA fees. In most situations where the homeowner is behind on these fees, the buyer will end up having to pay for them. This obviously could be an issue if the balance is hefty.

The even bigger problem is that the HOA could file a lien on the property for the late fees. This could hold up the closing of the short sale, or even worse: cause the parties to miss the closing deadline that was specified in the lender approval letter.

The best advice to give short sellers (and I always do so right from the start)  is to stay current with HOA payments, even when they are no longer current with their loan(s). This will assure a much smoother transfer of title and avoid any problems that could lead to a bungled short sale and a foreclosure.

If you have any other questions regarding short sales or questions related to legal ramifications of selling your home, please feel free to contact me at Rachel@LaMarRealEstate.org.

As expected, Congress has extended the Mortgage Forgiveness Debt Relief Act for one more year. This extension assures that homeowners who short sell their homes, obtain loan modifications or are subject to foreclosures, will not be liable for the taxation on mortgage debt that is forgiven by the lender(s).

Homeowners who currently have a short sale on the market, in escrow, or are considering listing their property as a short sale can breathe a sigh of relief and continue to pursue this path. However, as always, it is important to make sure to consult with your accountant, attorney, and a qualified short sale Realtor before pursuing a short sale or loan modification, in order to assure you are aware of all possible consequences and that it is the right option for you at this time.

The settlement reached by Congress also maintains the current capital gains rates on the sale of principal residences – the first $250,000 for single tax payers and $500,000 for married couples will be excluded.

Short sales have become part of the real estate landscape, and as one in four homeowners are underwater nationwide, they will likely continue to stay there for some time. Lenders have finally accepted this and have been trying to implement new programs to make them a better choice than foreclosures. For the most part, they are on the right track, but we are still seeing resistance and lots of snares in the road. The new Fannie Mae/Freddie Mac short sale program offers something big to struggling homeowners: the chance to short sale their homes even if they are current on their mortgage payments.

Normally, in order to short sale your home you have to be delinquent on your mortgage payments. Some lenders say they will consider short sales for those not yet delinquent, but the reality is that until you are late with your payments they don’t have the time to tango. Now, if your loan is securitized by Fannie or Freddie, you could be eligible for a short sale even if you are not delinquent, but can prove a hardship.

If you are in this situation you will need to contact your mortgage servicer and ask them to participate in the Fannie/Freddie non-delinquent short sale program. You will want to find a qualified area real estate agent who is experienced in selling short sales, and get your home listed on the market. Once you find a qualified buyer, you will present the contract to your servicer, along with proof of hardship (there is a packet of information you will have to provide – whether your servicer wants it up front or at the time you have an accepted offer will be up to the servicer).

Hardships: There are multiple kinds of hardship that could be acceptable. These may include job loss, injury or disability, major illness, job transfer (there are usually mileage requirements), pay cuts, divorce, and death of a borrower or wage earner, to name a few. If you think you have a hardship, contact your servicer to find out whether you qualify.

Caveats: There are a few things you want to watch out for if you are able to go through a short sale under this new program.

1. Credit implications: As with every short sale, you will need to be aware of potential credit hits. There is no lesser effect for these types of short sales, however, apparently it is in the works. Typically with a short sale you can expect your credit score to drop up to 150 points, but that really depends on where it was before you were approved for a short sale. I have seen some sellers take a big hit, and others barely see any negative effects. If you keep in mind the 150 number, that is most likely the worst case scenario. Hopefully soon there will be an exception with the credit bureaus for these types of short sales.

2. Second liens are another potential snake in the grass with the new program. First lienholders have agreed to pay only up to $6000 to second lienholders upon a successful short sale closing under the program. If you have a large outstanding second lien balance, there is a chance that lienholder may refuse to accept this sum (which is ridiculous, as they would likely get nothing if the home went to foreclosure, but such is the case). Make sure you know exactly how much you owe and what the second lienholder’s policy is – a savvy short sale agent/negotiator will know how to help in this regard.

3. Deficiency states: if you live in a deficiency state (where the state can go after you for the difference between the short sale price and what you owed on your mortgage), you need to beware. The lender may require a cash contribution to cover the difference on the loan balance, or possibly have you sign a promissory note. California is NOT a deficiency state, so selling your home via short sale requires NO contribution from the borrower, and there is no state tax liability on the sale.

As always, I recommend really understanding all the implications of a short sale before embarking on one. Make sure you hire an agent who really knows how to negotiate, as well as all the steps involved throughout the short sale process. If you are informed you will make the best decisions for you and your family. To find out whether your loan(s) is owned by Fannie Mae, visit https://www.knowyouroptions.com/loanlookup. For Freddie Mac loans, go to https://ww3.freddiemac.com/corporate/.

Images courtesy of Dreamstime.

Bank of America issued a notice recently to agents about the possibility of selling off loans in the middle of a short sale, which could drastically affect your short sale (and even cancel it last minute). It is very important that both homeowners and their agents understand what is happening, before listing a property for short sale.

As is customary, many lenders sell loans, even those that are delinquent – this is nothing new. But the fact that B of A sent out a notice about it is concerning, because of the timing that is mentioned for possible sales. The notice states that while in the midst of a short sale, borrowers’ loans may be sold to other servicers. If that happens, there is no guarantee that the pending short sale will close. Here are the steps by which this may happen (as spelled out in the notice):

•  Bank of America will send the homeowner a letter 15 days before the servicing transfer date.

•  Bank of America may call the agent to advise of the impacts to the short sale.

•  The new servicer will send a letter or statement advising the homeowner where to send payments.

The scary part is that B of A is giving itself an out – why would a lender approve a short sale, only to then sell the loan while the property is in escrow? This makes not sense whatsoever. B of A states, “Real estate professionals should advise homeowners that, similar to foreclosure, a servicing transfer is a risk that may occur at any time during the short sale process. This is why it is important to move as quickly as possible to facilitate the short sale.” Wow – if I have to tell this to potential short sellers, why would they want to risk a short sale? Why would a buyer want to risk making an offer, with the very real prospect of losing money and not closing? And why would I, as an agent, want to risk spending marketing dollars and time in selling the property? NO ONE WINS!

It seems to me here that B of A is trying to cover it’s behind, but this warning and the described act is contradictory to short sale approvals.

The solution here is this: if you have a B of A loan and are considering a short sale, you need to have your agent or negotiator discuss this with B of A before listing your home. I would ask to get something in writing that B of A will not sell the loan after the short sale has been approved and during the escrow period, up until the deadline that is provided in the approval letter. This applies whether you have a first or second loan with the bank. If B of A is not willing to do this, you can either take a risk or look into other options.

This move is a step in the wrong direction by B of A, and thus they remain on the top of my “lenders who are not cooperative” list. What a shame that this bank – Bank of AMERICA, for goodness sake, is not willing to truly help American homeowners. Maybe they ought to think about a name change.

It is almost here: the dreaded end of the federal short sale tax breaks, also known as the Mortgage Forgiveness Debt Relief Act. Come December 31, sellers who have not yet closed escrow on their short sales will no longer escape the capital gains tax on the difference between the sales price (of their home via a short sale) and the amount owed on their mortgage…UNLESS the tax breaks are extended. Will this  happen, and if not, what will happen to short sales?

First of all, I have to say that I think the tax will be extended. It simply does not make sense at this critical economic time to not extend the tax break. Doing so wreaks all kind of havoc, including surges in foreclosures and bankruptcy filings, which neither the government nor the banks want to see.

Failure to extend the act would undermine everything that is improving in the real estate market and cause us to jump many steps backwards. The fact that an extension has not yet been announced makes people nervous, but due to the Presidential election and other important issues on the proverbial table, I think it has been put on the backburner for a short time.

Lets take a look at the main arguments for not extending the tax break:

1.  Too costly. There are some who believe that the law will not be extended, as they feel the alleged $2.7 billion it will cost to do so is not justified due to the deficit. To this I would say it will be a lot more costly if millions of homes go into foreclosure again, as people find they have no other solution and cannot afford to stay in their homes. The lenders will be stuck with tons of inventory that they have to sell, many that will be trashed, and the market will drop again, creating another real estate nightmare. Just when we are coming out of the bad market is not a good time to cause it to dive again.

2.  Easy escape for homeowners – ? Another argument in favor of not renewing the tax savings is that doing so encourages people to default on their loans. In other words, if people know they can short sale their homes and walk away without financial ramifications, it makes it easier than staying in a home they cannot afford and trying to make it work. I do not agree with this argument, as I think the stress would just lead to more bankruptcy filings and foreclosures, which in the end is even worse for the lending institutions (not to mention for millions of families).

It remains to be seen what will happen come the end of the year. The bottom line is this: if you are contemplating a short sale and your house is not yet listed on the market, or if your home is listed but you have not yet sent any offers over to your short sale lender, it is a good time to discuss your options with both your agent and a financial adviser, CPA and/or attorney. You must understand your options and what could happen if the law is not extended, because it could effect your decision whether to close your short sale.

If you are in the middle of a short sale and you have obtained or are soon to obtain lender approval, you need to make sure that the lender(s) release you in writing from any financial liability once escrow closes, if it is to close after December 31.

[Note that regardless of when your short sale is closing, you should ALWAYS make sure the lender approval letter has language to this effect...most lenders automatically state such in the approval letters, but if not you need to have your agent or negotiator ask that it be included]. You also need to check your state laws to determine state tax liability with short sales, as laws do vary. For more information about short sales you can visit my website.

Some of the big lenders are making grievous errors that are costing homeowners, buyers and their agents time, money and much aggravation. The biggest problem is that oftentimes departments claiming to help borrowers do not communicate. Let’s look at an example.

Let’s say a seller is in the middle of a short sale, almost to the approval phase when, to his excitement, he discovers his loan interest rate has reset and lowered – maybe he can actually afford the payments now, and wouldn’t that be great to keep his home! So he calls the loan modification department, and the representative tells him they can help him work it out, but he must cancel his short sale, so together they contact the short sale department and the seller cancels his short sale.

The seller has nothing in writing stating that his loan modification will be granted, and no promises are made. Here is the issue: the loan modification department let the seller cancel the short sale without providing terms and explaining how any agreements will work, including any monetary consequences involved. If the loan modification does not work out in his favor, the seller may have no options left but to foreclose (unless the lender allows another short sale attempt).

The above scenario is frustrating, and as much as it would make me very happy for all the distressed sellers out there to discover there was a way for them to keep their homes, I do not believe that anyone should make a decision without facts, including either a written offer with terms or a written agreement.

The solution here is for the loan modification department and the short sale departments to communicate and change their policy. Sellers should not be required to cancel their short sales until they know whether they will qualify for a loan modification. Even if they do qualify, they may not like nor be able to afford the new payments. Therefore, there should be a holding period for the short sale, where the seller and the loan modification department have to work out a plan. This period should take no longer than 10-14 days. If at the end of that period the seller is not satisfied with the terms offered, s/he should be able to jump back into the short sale.

This is a simple solution that will prevent unnecessary foreclosures…because NO ONE SHOULD MAKE A DECISION WITHOUT LEARNING ALL THE FACTS AND CONSEQUENCES FIRST. I challenge big lenders to do the right thing and truly help distressed borrowers by not pushing them into a corner from which they may not be able to escape.

Beginning November 1 there will be some significant changes to how short sales are handled, and the new guidelines could be a big benefit to those sellers who otherwise may not have been able to short sell their homes. A short sale is when a home is sold for less than the amount owed on the mortgage(s), allowing the borrower to escape some of the harsher ramifications from a foreclosure.

The Federal Housing Finance Agency (FHFA) is changing the Fannie Mae and Freddie Mac short sale guidelines, which will allow borrowers to be qualified by their servicers for short sales in a more timely manner, and will apparently streamline the short sale process, making it smoother and, dare I hope, quicker. How are they planning to do this? Here are the changes that are anticipated:

• A single short sale process will be created for Fannie and Freddie short sale programs. This will allow for smoother and streamlined processing time, which will enable agents and homeowners to determine timeframes for approval and closing. Servicers must respond to short sales within 30 days, with a final decision for the borrower by 60 days after submission.

• Borrowers who are current on their mortgages will be able to qualify for short sales (subject to showing they have a hardship), without waiting for short sale approval from Fannie and Freddie, and instead of waiting until payments are missed, thus eliminating further damage to credit scores and helping to clear short sale inventory much quicker. Most importantly, the guidelines for proving hardship will be loosened.

•Provides special treatment for military personnel who have received permanent change of station (PCS) orders. Personnel who are being relocated will automatically be eligible for short sales, even if they are current on their mortgages.

• May provide up to $3000 in relocation assistance to those borrowers who qualify.

• Allows and standardizes foreclosure suspensions on approved short sale properties. This one is big – it will prevent servicers from foreclosing on your property if your short sale has been approved, so no more worrying during the short sale process that the home will be sold at auction during that time.

• Payment to secondary lien holders by Fannie and Freddie of $6,000. Although this happens frequently already, it will be nice to have a guarantee that Fannie and Freddie will offer these subordinate lien holders money, which makes getting their approval on short sales a bit easier.

The potential downside of these changes is that there may be large supplies of short sale inventory in some areas, which could have a negative effect on area home sale prices, at least until the supply is sold.

The upside to this new process is that it will clear the market of distressed property, which will allow a return to “normal” growth cycles in the future, and instill higher levels of consumer confidence in the markets. It will also be positive news for those home sellers who would have headed toward foreclosure, providing an easier way out from under a mortgage that was literally sinking them.

These new guidelines are a step in the right direction, as we need to clear out this inventory and make the process easier and not so mysterious. The proof will be in the pudding, however, so I am definitely looking forward to November 1, and streamlined short sales. If you have questions about short selling your home, please feel free to contact me.

Experience pays off, especially with short sales. If you are trying to short sell your home, but were denied money back under the HAFA program, be advised of this warning to avoid problems down the road when you are ready to close: your agent needs to make sure that the bank negotiator changes the status of your short sale from a HAFA short sale to a traditional short sale.

Here is what should happen: the bank will need to issue you a denial letter, decline the short sale, and then your agent will need to re-initiate your short sale with the bank as a traditional short sale. You will want to make sure this is taken care of as soon as HAFA funds are denied, otherwise you could possibly end up going to foreclosure.

I had a short sale listing that was scheduled to close this Friday. I submitted the final HUD yesterday. I then received a call from the bank closing agent telling me that we need to deny the short sale and re-initiate it as a traditional short sale, as the bank negotiator did not do that when she should have. This essentially means that the short sale process starts ALL over again! After months of awaiting approval, no one wants that to happen.

I was on the phone yesterday calling all my contacts at the bank, trying to get help from whomever I could…it worked. I was contacted today by a short sale manager, who humbly apologized for the bank’s mistake. She has the new negotiator fervently working our file now to get everything approved as quickly as possible. I was so grateful to her and to the new negotiator, and also to the short sale closer who has been very helpful.

It is so important with these short sales to make sure that all the stars are aligned. Sometimes, as a short sale agent, you need to do the work of other people as well as your own (including that of the bank, in some cases). I learned an important lesson today, from a situation I have never seen nor heard of. Luckily I was able to work it out, but if I had been inexperienced that would likely not be the case.

If you are short selling your home, please make sure you have a very experienced short sale agent on your side, one who knows how to communicate with the lender and how to handle crazy situations, should they arise.

For more information on HAFA click here.

Image courtesy of Dreamstime.

I have a new listing in the wonderful community of Del Sur in San Diego, and this is one beautiful home! It is being offered at $535,000.

This 4 bedroom, 3 bathroom home offers 2000 square feet, plus a fabulous entry entertainment/den with fireplace, that has been enclosed with windows (it was built as an indoor/outdoor room).

Filled with light, this home has numerous upgrades and features, including green features like solar panels and a tankless water heater.

Other features include:

• Granite counters

• Stainless steel appliances, 6 burner stove, range hood and upgraded cabinetry

• Wide plank hardwood flooring downstairs and in master

• Custom paint and designer carpeting

• Two fireplaces, upgraded fixtures and fans

• Quaint landscaped yard and patio area off living room

• Upstairs laundry room with sink

Del Sur is a master planned community situated just a few miles inland from Del Mar, and bordering Rancho Santa Fe. Surrounded by hills and miles of trails, Del Sur has so much to offer., including multiple pools and parks/tot lots, a gorgeous “Ranch House” community clubhouse, and prestigious Poway schools.

This home has been impeccably maintained and is in move-in condition. It is being sold as a short sale.

Please contact me to schedule a showing, or visit the open house this Sunday from 1:00-4:00. 760-310-9466.

MLS number 120029250. For virtual tour visit http://www.flashitfirst.com/bt/8385_Reagan_Glen.html

Are you thinking about short selling your home, but worry about possible tax consequences if it does not close by December 31 (the end of homeowner tax relief under the Mortgage Forgiveness Debt Relief Act)? You may be in luck, even if the Act is not extended.

The Mortgage Forgiveness Debt Relief Act (MFDRA), which prevents the federal government from taxing the difference between the sales price and amount owed on a mortgage in short sale and foreclosure situations, expires on December 31 of this year. Many agents are advising their clients to make decisions quickly if they are planning to short sale their homes, so that there is time enough for marketing and obtaining lender approval before the deadline – and since we are already at the halfway point in the year, time is ticking. But there is another way to protect yourself from the federal taxation even if the act expires and you want to short sale your home.

Little  known to many, the Internal Revenue Code, section 108, provides a “moment of insolvency” document that could save you from taxation should the act not be extended.

Section 108 has an “insolvency” exclusion, which allows you to avoid taxation if you can show you are insolvent. To figure out whether you qualify, you need to take your total liabilities immediately before the discharge of debt, minus the fair market value (this includes exempt assets like retirement accounts and pension plan interest) of your total assets before the discharge. The resulting number will give you the extent to which you are insolvent. This amount cannot be taxed federally.

It is important to note that many people who are short selling or foreclosed upon do not have assets to cover their responsibilities, thus the reason they are in this position. So if the MFDRA is repealed and you didn’t have time to short sale your home before, you may still be in luck. I highly advise you to consult with your CPA or tax professional to see if you are insolvent.