Though the Mortgage Forgiveness Act will likely expire at the end of the year; Bert Gor offers a critical refresher of the act’s main tenets.
Whether you have done one, or you have done 50, you know that there is nothing “short” about a short sale. The only thing that is short is our patience, at times. Although it seems that most lenders have picked up the pace in recent times, it is fair to say that the industry average is still around 90 days for written approval.
On average, I tell clients that this is a minimum four-to-six month process, but depending on whom the lender/servicer is, it might be more like nine. Not to mention many sellers have more than one lender and or mortgage insurance (PMI), all of which can add time to the overall process.
The big issue we are faced with now is the Mortgage Forgiveness Act (MFA), which was extended for one more additional year but expires at the end of this year. As a reminder, the MFA has nothing to do with the deficiency (the forgiven amount from the short sale lender), but rather, a possible IRS tax consequence that could be imposed on the forgiven amount from a lender.
Many people do not realize, but if one were to negotiate an outstanding balance on a credit card, and settle it for say 50 cents on the dollar, whatever amount the credit card company forgave would be looked at as taxable income by the IRS. When selling real estate via a short sale, the same principle applies, but the numbers are just much larger.
In late 2007, The Mortgage Forgiveness Act of 2007 was enacted by Congress to allow struggling homeowners to sell their home, and “if” they qualified, avoid having to pay tax on the forgiven amount. I say “IF,” as not everyone will qualify for the MFA even if they accomplish their short sale prior to the end of 2013.
For example, you could do a short sale for a homeowner who had a first and second mortgage, but the second was used to send a kid to college, or pay off credit cards, and it was NOT used to purchase the home, they may have to pay tax on the forgiven amount. Although, and I will not get in to this here today, there still are other legitimate tax loopholes that may apply depending on the individual financial circumstance of each short seller. One of them might be what the IRS refers to as “insolvent” and it is not to be confused with bankruptcy.
Regardless, I am still finding that most of my sellers still qualify for the MFA. I am personally very selective about who I list. When I look to determine if I can help a seller, I do a lot of due diligence. If I see that the homeowner bought the home, put down the typical 5/10/20 percent, and has NOT refinanced a bunch of times, it is likely they will qualify for the MFA if their lender agrees to forgive them the shorted amount. Also, keep in mind that the MFA only applies to primary residences.
I think a good rule of thumb is that if their mortgage balance is not MORE than what the original loan amount was when they bought the home, they will be a good MFA candidate. Although, with all that said, we are real estate brokers and NOT tax professionals. You must align yourself with a tax professional that understands the “current” tax code.
Ironically, my research has shown that the people that benefit the MOST from the MFA are also the people that will suffer possibly the largest tax consequences if their short sale is not completed prior to the end of this year. I have a pretty firm belief that the MFA will not get extended another year. I really hope it does, as I feel strongly that without it, homeowners will think foreclosure is a better option, but this remains to be seen and we must take action as if it were not.
Therefore, it is imperative to get the homeowners that are still on the fence, because “they did the right thing” but are grossly upside-down, off and running so that they can fully benefit from the MFA. Fortunately, the market is going bananas this year. So if you get a seller to list now, you may be able to still get them closed by the end of the year, taking in to consideration that the average approval time is around 90 days. It is imperative that you get sellers to gather all their financial documentation together prior to having an offer.
This will allow you to only have to update a few items once the offer does come in. A short sale is only successful if everyone works together from day one.
If you are new to the world of short sales, I strongly urge you to take some classes to educate yourself about short sales. I personally would recommend considering becoming a Certified Distressed Property Expert (CDPE), as it is in my opinion the best training money can buy. I became a CDPE long ago and it has helped me navigate the world of short sales.
Furthermore, I believe that they are an organization that can help your business when you need it once you become a CDPE. Together with knowledge and patience, we can help changes people’s lives. That is what I personally enjoy the most about my job – changing lives and helping people and their children better themselves long term.
Bert Gor is the president of The Short Sale Group, Inc. with RE/MAX Professionals Select. In the last five years in a row, he has been the No. 1 ranked RE/MAX short sale agent in Northern Illinois and has also been ranked in the prestigious RE/MAX Top Five of all Northern Illinois agents.