Short selling a home in New York is one alternative for resolving the underwater mortgage. Others include refinancing, loan modifications, deed in lieu of foreclosure agreements, and of course bankruptcy. The short sale, though, is quite common and the process is essentially simple. The homeowner sells his or her house for less than the remaining balance on the mortgage, but the homeowner still must resolve the deficiency, which is the difference between the sale price and what’s left on the mortgage. There are several things worth knowing about short sales.
First of all, banks will avoid canceling the deficiency, which makes this a critical point when negotiating a short sale agreement. If the bank says nothing, homeowners can expect to be stuck with the bill. Even if the bank does agree to forgive the remaining balance, the homeowner must claim that as income and pay income tax on it. This is the IRS Form 1099-C. Consequently, those considering short sales need to consider what happens to the deficiency and how much it will cost them in income tax payments.
Next, it’s important to note that homeowners who have multiple mortgages on their homes will have more work to do because all mortgagees must approve the short sale. Things can get especially tricky if more than one mortgage will end up deficient, but if the alternative is bankruptcy or foreclosure, lenders will have an incentive to negotiate.
Executing a short sale isn’t always easy. Banks won’t give in easily to homeowners who aren’t in a hardship situation. Those who have high incomes or retirement investments that can be used to pay mortgage balances will have difficulty gaining approval. Buyers can sometimes withdraw if they find better options, so asking the buyer to deposit money in an escrow account can prevent the deal from falling through. Ultimately, consulting with professionals in real estate, tax, and law is usually a wise move.
Finally, those who are underwater on their mortgages and are suffering financial difficulties can avail themselves of the federal government’s Home Affordable Foreclosure Alternatives Program (HAFA). Those who meet the eligibility requirements can avoid paying on deficiencies and receive up to $3,000 if they successfully complete a short sale.
Underwater homes are a real tragedy for New Yorkers, but they can be dealt with through effective use of professionals. Just remember that filing bankruptcy can also be a strategic option worth exploring.
For more questions about short sales, underwater homes, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced New York bankruptcy Bruce Weiner for a free initial consultation.
