The Short Sale
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General Timeline for a Short Sale
Mortgage Forgiveness Debt Relief Act
Start to Finish – The First 30 days
What is the Mortgage Forgiveness Debt Relief Act of 2007?
Day 1 – 10
The Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA) was enacted on December 20, 2007 and allows an exclusion of income realized as a result of a loan modification, foreclosure or short sale on your principal residence.
1. View property and establish list of repairs if any 2. Take pictures 3. Establish need for Short Sale 4. Write and deliver letter of authorization to lender(s) to discuss Short Sale possibility 5. Prepare CMA with Seller net sheet on paying lender(s) in full and another based on a liquidation appraisal 6. Establish list price to pay Lender(s) in full 7. List property for sale 8. Obtain a hand written hardship letter from seller(s) detailing why they need a Short Sale
Day 11 - 30 1. Obtain the following from seller(s) a. 2 months of bank statements b. 2 months of pay stubs / receipts c. Most recent tax returns
What does that mean? Usually, debt that is forgiven by a lender must be included as income on your tax returns and is taxable. The MFDRA allows you to exclude certain cancelled debt on your principle residence from taxation.
Does the MFDRA of 2007 apply to all forgiven or cancelled debts? No, the Act only applies to debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. Any mortgage debt that was not used for these exact purposes would be taxable.
2. Contact loss mitigation department of lender(s) a. b. c. d.
fax hardship letter fax all bank statements and tax return fax all copies of listing agreement and net sheet fax CMA with opinion letter of realistic value and net sheet
Does this provision apply to only the year 2007? It applies to qualified debt forgiven in 2007, 2008 and 2009.
Can I exclude debt forgiven on my second home, credit card or car loans?
Day 31 and forward
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes
1. Fax 2nd copy package as lender always loses 1st copy. 2. Be patient…. Wait 30 days for response. 3. Adjust price to market value 4. Make minor repairs if needed 5. Request formal appraisal
What If forgiven debt doesn’t qualify for exclusion is there help? Yes, you may qualify under the “insolvency” exclusion or under Title 11 bankruptcy. Normally, a taxpayer is not required to include forgiven debt if determined to be insolvent. Speak with a tax professional or a Bankruptcy Attorney for more information. (To learn more about your bankruptcy options ask for a free copy of our booklet titled “Is Bankruptcy for me”