Short Sales in Michigan - The Basics

If you are a homeowner, in Macomb or Oakland County, and are concerned that your home may go into foreclosure and you have not qualified for alternatives that would enable you to stay in your home, a short sale is an option you may want to consider.

There are alternatives to bankruptcy or foreclosure proceedings for homeowners who can no longer afford to keep mortgage payments current. One of those options is called a "Short Sale".

A short sale is the process by which a homeowner can sell a house for less money than actually owed on the mortgage(s).

Sometimes, to avoid going through the costs of foreclosure, a lender will sanction a short sale by allowing a homeowner to sell (allowing a home buyer to purchase) the home for less than the mortgage balance.

How Do I Qualify for a Short Sale?

The decline in market value of a property below the total debt owed on that property does not automatically qualify a homeowner for a short sale. Banks take several factors into consideration when determining if it will allow for a short sale to occur.

Qualifications for a Short Sale

1. The Home's Market Value Has Dropped
   Comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.
2. The Mortgage is in or Near Default Status
   It used to be that lenders would not consider a short sale if the payments were current, but in many cases, lenders realize that other factors contribute to a potential default making them eager to head off future problems.
3. The Homeowner Has Fallen on Hard Times
   The homeowner must submit a letter of hardship that explains why they cannot pay the difference due upon sale, including why the homeowner has or will stop making the monthly payments.
   
   Examples of Hardships Are:
   
   • Unemployment
   • Divorce
   • Medical Emergency/Sudden Illness
   • Bankruptcy
   • Death
   • Job Transfer Out of Town
   • Other unforeseen circumstances that caused financial hardship
4. The Homeowner Has No Assets
   The lender requires copies of the homeowner’s most recent tax returns and financial statements. If the lender discovers assets, the lender may not grant the short sale because the lender will feel the homeowner has the ability to pay the shorted difference. Homeowners with assets may still be granted the short sale but could be required to pay back the shortfall.

What are the Consequences of a Short Sale?
A short sale is dependent on a home buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the home buyer's offer. We make it easier to understand with our short sale time line breakdown.

Tax Consequences
If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007.

You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.

Blemished Credit Report
A short sale will show up on your credit report. It's a pre-foreclosure that has been redeemed. Short sales affect credit ratings. Always seek legal counsel before attempting to pursue a short sale. A Realtor cannot give you legal advice.