FAQs

It should make it easier to get your short sale approved. Ordinarily a seller in a short sale has to prove to the lien holder that they are unable to pay the full loan balance. This is done by providing financials such as bank and asset account statements, pay stubs, W-2 forms, tax returns, etc. After a discharged bankruptcy, you shouldn’t need to provide any financials because the mortgage obligation has been discharged (meaning you don’t owe the debt at all). Your negotiator would likely only need a copy of the bankruptcy discharge and the Letter of Authorization, Hardship Letter and Miscellaneous Information form.

There is one minor qualifier I’d like to add. Even though the lien holder doesn’t need financial information after a bankruptcy, it’s not uncommon for a lien holder to request these documents because their software won’t allow them to proceed without having populated certain files such as bank statements, pay stubs, etc. In these cases, the negotiators usually find it easier to simply provide the requested information (to get the process started) instead of trying to convince the “customer service rep” at the lien holder that this information is unnecessary.

Yes and no. While a short sale would be better for them than a foreclosure (with regards to their future credit options) most folks who’ve filed bankruptcy are at the end of their emotional rope in addition to being at the end of their financial rope.

Many bankruptcy attorneys simply advise their clients to allow the home to go to foreclosure because they don’t consider the impact of credit in their analysis. In quieter, more reasonable times, an informed person would likely choose to do a short sale rather than a foreclosure. But if the homeowner is too worn down by the stress and pressure of their circumstances, they’re not always thinking clearly.

I prefer to get to a homeowner BEFORE they become emotionally bankrupt. Help them understand their circumstances so they can choose their outcome and participate in the process. During rational thinking times, that homeowner would choose to file bankruptcy and then proceed with a short sale afterward rather than allowing the home to go to foreclosure.

I know it’s hard to think about anything other than your current hardships but someday your credit will be important to you again. When that day comes, you’ll want your credit report to say bankruptcy/short sale and not bankruptcy/foreclosure.

Creditors will judge you based on your past credit history. A bankruptcy/short sale says that you did everything you could during very difficult circumstances, in challenging times, to make the best out of a bad situation. A bankruptcy/foreclosure says that you gave up and didn’t give any consideration to the lender’s losses. You want to put yourself in the most favorable position for future success in borrowing.

All contracts binding a debtor are voided upon the filing of a bankruptcy. This is true of both listing agreements and purchase contracts. However, the reality is that most people don’t know this so they proceed as they normally would and, after the discharge is complete, perform as though the contract was enforceable but, in reality, it’s unenforceable.

If all parties want to continue onward after the property rights revert back to the homeowner (whether through discharge, abandonment or relief of stay), the buyer and seller can execute an addendum stating that “The contract/listing agreement dated XX/XX/XXXX is reaffirmed and in full force and effect” or they can execute a completely new agreement or they can just pretend that it’s still in effect (like everyone else does) as long as everyone understands that it’s not an enforceable agreement. That means that if one party chooses not to perform, the other party has no remedies against them. Also, the seller is short selling. The seller doesn’t have the time or money to sue a buyer who defaults and the buyer doesn’t have time to sue the seller because by the time they get to trial, the house will be foreclosed upon and the seller couldn’t deliver title if they wanted to.

In reality, how many listing agreements have you ever sued the homeowner to enforce? If enforceability has any value to the parties involved, it’s best to start over or reaffirm the original contract(s). As a professional practitioner, I’m confident that your managing broker would want all parties to ratify an enforceable contract.

Rebuilding credit is the same process as establishing credit. You have to demonstrate that you can responsibly borrow and repay over time. Start with getting basic credit cards if creditors will issue them to you. Department store credit cards are usually the easiest to obtain. Routinely charge some reasonable amount each month and pay off the balance some months while paying more than the minimum but less than full balance other months. Try to never have an outstanding balance of more than 20% of the credit limit at one time.

If you cannot qualify for a traditional credit card, get a secured credit card by placing a deposit equal to the amount of the charge limit you seek and follow the same procedures. We can recommend secured card providers if necessary.

Generally, your credit rating will self-repair from month 7 thru month 24 if borrowing and re-paying as agreed. It’s recommended that you have two national credit cards (Visa/Mastercard) and one or more additional accounts (car loans, lines of credit, department store cards, etc).

When you attempt to rent, be upfront with the prospective landlord that you are in the middle of a short sale because the economic downturn caused you to make horrific choices that are completely not in keeping with your character or your historical performance. Assure them that you have always been, and will continue to be, a good borrower and a good credit risk. This negative event was not of your causing and you simply had to manage a bad situation the best way you could. Encourage your landlord to look at your “credit history” and not your “credit score”.

Some landlords actually prefer homeowners coming from a short sale because your most recent frightening short sale/foreclosure experience will likely make you a tenant committed to paying on time.

It’s possible (and likely) that the landlord would ask for additional security deposit (many ask for two months) with the first month’s rent. This should be considered normal for you. Very few will reject you outright. Too many prospective tenants today are coming from the short sale market.

As with many things, how you present your circumstances will affect your outcome. For example, here are two explanations of the same event. Do these two explanations sound different to you?

1. I’ve damaged my credit because I didn’t make my mortgage payments. I got in over my head and had to do a short sale; OR

2. Due to a historic economic downturn, changing loan terms and plummeting property values, I was unable to continuing paying the mortgage under the agreed terms. After many discussions with the lien holder, it was made clear that the only choices available to me were either short sale or foreclosure. The entire process violated every sense of honor and integrity in my body but I worked hard to manage this negative event to the best possible outcome for all parties.

If you choose a popular rental that has several applications, don’t be surprised if the landlord chooses the candidate with spotless credit. But you won’t be homeless and you will have choices.

Remember that once you choose to stop mortgage payments and begin a short sale, it’s not a perfect process. You will have very few good choices. Most choices range from bad to worse. Our collective goal is to help you make bad choices and to avoid making worse choices. The only way to avoid these bad choices is to continue making your mortgage payments which, if you’re like most people, is not an option.

Your credit will be damaged. That’s the unfortunate truth. However, you will be able to borrow money again in the future. Please keep in perspective what it means to have damaged credit and its practical effect on your day to day life. Credit only has value when either borrowing money or when being used to determine eligibility for certain jobs/employment opportunities (or security clearances).

Current Fannie Mae mortgage underwriting guidelines (as of this writing) provide that a borrower is eligible for a market rate, market term, Fannie Mae insured mortgage two years after a short sale, three to three and a half years after a foreclosure and five to seven years after a bankruptcy. An exception is made for “walk-away” foreclosures. Fannie Mae recently revised their guidelines to say that an individual with a walk away foreclosure (meaning that they didn’t attempt a modification or short sale) will not be eligible for seven years.

We DO NOT recommend walk away foreclosures. We always recommend doing everything you can to mitigate your losses and the lender’s losses.

Therefore, if you don’t expect, or need to, borrow money in the next 24 +/- months, and/or if your job is not dependent on your credit, a short sale will have little to no impact on your day to day life.
While that’s a nice summary, I’d like to offer a more detailed view of the credit impact of short sales and foreclosure.

We often use the term “credit” when really we are referring to our credit score. But when our “credit” is being reviewed for either a loan application, employment or otherwise, the reviewer is actually analyzing our credit profile. Our credit profile is a combination of our credit score and our credit history.

A short sale (or foreclosure) is a negative credit event and can have an immediate downward affect on your credit score. This is true whether you continue to make payments on your mortgage prior to the short sale or stops making your payments prior to the short sale. Your credit score is a reflection of immediate current circumstances and can fluctuate up or down, modestly or dramatically, at any given moment based on a variety of reported factors and variables (positive and negative credit events).

Please don’t focus on your credit score. Your credit score will improve over time and will self-repair. If you return to a pattern of good credit behavior (paying on time and as agreed) most credit scores will return to their prior levels within 24 months of the last reported negative event.

Your credit history is a historical collection of data about your credit behavior over measured periods of time, both short term and long term. Credit history provides insight into the predictable nature of your credit performance and helps reviewers of your credit history understand and determine your likely behavior with regards to future credit. In other words, past behavior is an indicator of future performance.

When someone is reviewing your credit (underwriter, employer or prospective landlord) they are they are actually trying to determine your future behavior. Will you be likely to pay your rent or repay a debt on time and as agreed and/or will you exercise good judgment and decision making regarding the loan or job? Past credit events provide indications about your future behavior. However, they are more concerned about how you’ve acted last month and in the past six months than how you behaved two, three and four years ago. Aged data isn’t always reliable when trying to determine how you’ll behave next month. The more time that passes since the negative credit event, the less reliable that event is in predicting future behavior.

In summary, a credit score is a reading from a moment in time while a credit history is a predictor of behavior. Both are considerations in your credit profile.

If your credit history shows a pattern of good performance over long periods of time but includes a negative event (short sale or foreclosure) during an isolated period of time, the reviewer of your credit profile can (and likely will) take that into consideration. You might be asked to explain the circumstances surrounding the negative credit event. This is done in a Letter of Explanation. How you describe and represent your circumstances, choices and behavior could impact the reviewer’s decision.

It’s important to understand (and to explain) that your event (short sale or foreclosure – and sometimes bankruptcy) was not of your causing. You were caught in a historic economic downturn which caused an unprecedented drop in home values. If you are like most homeowners experiencing this challenge, your greatest offense was bad timing. You probably bought or refinanced your home in 2005, 2006 or 2007.

Here’s an example of a Letter of Explanation. This sample letter refers to a short sale and the phrasing is generalized. Obviously, it will have to be adjusted based on your specific facts and circumstances and whether the event has already happened or has yet to happen.

To Whom It May Concern:

I’m writing to address the short sale reference on my credit report. On August 20, 2010, I sold my property located at 123 Main Street, Anytown, VA, 12345. Due to a significant decline in home values I owed more money to my mortgage lender(s) than my home was worth which required me to do a short sale. A short sale means that my lender(s) agreed to accept less money than they were owed in order to release their lien on the property. They agreed with my assessment that the current value of the property was significantly less today than when they approved my mortgage in 2005. Furthermore, my lender(s) agreed that my personal hardship (see attached letter) sufficiently explained why I had to sell the home now and was no longer able to pay my mortgage(s) as originally agreed.

In order to qualify for the short sale, I was required to stop paying my mortgage and also required to demonstrate that I did not have the financial means to repay the debt in its entirety.

Please understand that while my credit score may be temporarily affected by the short sale, it is not in keeping with my overall credit history which reflects excellent performance, choices, judgment and behavior. My credit is very important to me. It was personally embarrassing and difficult to endure the pain of a short sale. However, while I accept the credit consequence of my short sale, I understand that I was not the cause of the circumstances creating the short sale. Please consider my credit history as the best indicator of my eligibility for this loan/job/rental.

I ask that you look favorably on my application for all the reasons set forth in this letter. Thank you for your time and consideration. I am happy to provide any additional information upon your request and look forward to your favorable response.

Sincerely,

Your Name Here

The only way to avoid damaged credit (by short sale or foreclosure) is to continue paying your mortgage on time and until maturity or when the loan is fully paid. For most of us, that is not a possibility. It’s often not a matter of whether we will default but when we will default. Since it takes at least 24 months to return our credit to pre-default levels, the longer we delay the decision to default the longer it will take to return to “good credit” status.

Anyone who signed or co-signed the Promissory Note is equally responsible for paying the loan and must be included in the short sale process and will have their credit impacted by the short sale process.

Use of the word “co-signer” can often be confusing. The important issue is whether your father-in-law actually signed the Promissory Note with you and your wife. This cannot be determined by reviewing a title search (the Deed or the Deed of Trust). It can only be determined in one of three ways:

1. Check the actual promissory note signed at closing. Anyone who signed it is obligated and will be affected by the short sale; or
2. Look at the names on a mortgage payment statement. Usually all borrowers are named on the statement; or
3. Call the lender and ask the direct question, “Who are the borrowers on this loan.”

Many homeowners believe that if they are on the Deed or Deed of Trust that they are on the mortgage. Or they believe the reverse that if they are NOT on the Deed or Deed of Trust that they are not on the mortgage. Neither is universally true. If you determine that your father-in-law is a co-signer, he will have to provide all of his financials as if he were the primary borrower. An important requirement of a short sale request is proving that the borrowers do not have the money to repay the remaining indebtedness of the mortgage.

The lien holder requires proof that none of the borrowers or co-signers has the ability to repay the mortgage. If your father-in-law is a co-signer and he has the ability to repay you should proceed with caution. Once you provide financials to the lien holder, you can’t take them back. In cases where a borrower has the ability to repay, short sale may not be the best option. If this describes your situation, a private consultation to discuss all available options would be recommended.

A Deed in Lieu of Foreclosure (DIL) means that you simply deed the house back to the bank (with their consent) in order to avoid the process of foreclosure. The theory is that it’s far more efficient for all parties. It saves the bank the expense and delay of foreclosure and it usually comes with an automatic release of remaining liability for the borrower/homeowner.

As we know, theory doesn’t always work in practice. DIL’s are often discussed but rarely offered by the banks or available to a borrower. When a bank accepts a DIL, it accepts ownership of the property subject to ALL of the existing liens. That’s why a DIL is never offered when there is more than one lien because the primary lien holder can foreclose and eliminate all subordinate liens at auction. Why would they accept responsibility for subordinate liens if they can eliminate them by foreclosure? That’s a rhetorical question.

From a credit perspective, DIL’s are treated the same as short sales. I always recommend to homeowners that if they are eligible for a DIL that they immediately show interest. Inquire about the availability. Ask to see a written copy of the terms to confirm that the DIL includes a full release of liability and then sign it before the bank changes their mind.

The lien holder wants the following language included in the Listing Contract/Agreement: “Seller may cancel this agreement prior to the ending date of the listing period without advance notice to the broker and without payment of a commission or any other considerations, if the property is conveyed to the mortgage insurer or the mortgage holder”

I question why the lien holder would ever interfere with the language of a listing contract UNLESS they intend to offer a Deed in Lieu of Foreclosure (“DIL”) to the seller/homeowner. In the event of a DIL, the seller would simply deed the property to the lien holder instead of waiting for a short sale approval or a foreclosure.

A DIL can be favorable to the seller because it should include a complete forgiveness of any remaining indebtedness and a DIL has the same impact on their credit report as a short sale. Of course, with a DIL, there are no commissions because there is no sale to a buyer. I’m sure you would accept the seller’s choice for a DIL if it was in their best interest and if the property wasn’t already under contract.

The language they are seeking will not apply if the property is already under contract. A seller can’t cancel a listing after the property is under contract and a seller can’t default on a purchase agreement after ratification. The only way to make this work if the property is under contract is to also include it in the purchase contract and have the buyer accept the terms.

While Deeds in Lieu of Foreclosures are popular to discuss, they are extremely rare. They are never offered when the property has two trusts and rarely offered when the property has only one trust because the lien holder takes title to the property subject to any liens or claims, known or unknown. If a seller is ever offered a DIL, and if it includes a full release of liability, they should strongly consider accepting it. I am not sure from your question whether a DIL has been officially offered to, or discussed with, the Seller.

My initial reaction is to say NO to this request from the lien holder unless it’s tied to an actual offer of a DIL and there is not a ratified contract. I also realize that saying “NO” could delay the pace of negotiations as the lien holder holds firm to an unrealistic request. It may be easier to propose alternate language that could satisfy them. Try this:

“In the event that the Seller chooses to accept a bona fide offer of a Deed in Lieu of Foreclosure from the mortgage insurer or the mortgage holder, the Seller may cancel this agreement, with written notice to the Listing Broker, without payment of a commission or any other considerations. The Seller’s right to cancel this agreement shall expire upon the ratification of a purchase agreement with a Buyer.”

The credit impact of a deed in lieu of foreclosure (DIL) is similar to a short sale, which means that they’re preferred to the credit impact of a standard foreclosure. A DIL means that the homeowner simply deeds the property back to the lien holder (with the consent of the lien holder). A foreclosure means that the lien holder forced the sale of a property under the terms of the mortgage or deed of trust. Deeds in lieu of foreclosure are significantly less expensive than foreclosure but they can come with unforeseen title risks to the lien holder.

Foreclosure eliminates subordinate liens (such as 2^nd liens, home equity lines, judgments, etc). Foreclosure is a way of stripping and purifying the title. Foreclosed title is some of the risk free title one can acquire. A DIL transfers title with all existing title issues, known and unknown. For example, anyone with two or more liens will never be offered a DIL because the primary lien holder would not accept title with another lien on it. They would rather foreclose and eliminate the lien.

If a seller receives a legitimate “offer” of a DIL, they should always ask the lien holder for a written summary of the offer with copies of all documents they would require the seller to sign. If the lien holder can’t provide a written summary or copies, it’s not a legitimate offer. Once a written offer is provided, the seller can make an informed decision as to whether it’s in their best interests to accept the DIL offer, or not. One major advantage of a DIL is that lien holders will often include a release of remaining liability in exchange for a DIL.

Generally, a DIL is only “available” to homeowners who have only one lien because the lien holder who accepts a DIL takes title subject to all existing liens. There are rare exceptions (such as if the same note holder has both loans) but those exceptions are very rare. If you have two loans and they have the same servicer (such as Wells Fargo) that does NOT mean they are the same note holder. Most likely, there are two different note holders using the same servicer. In that case you would not be eligible for a DIL even though it appears as though the 1st and 2nd lien holder are the same “lender”.

If you believe you only have one lien on your home, and you are interested in pursuing a DIL, call your servicing lender and ask the following questions:

I have some words of caution if you seek a DIL. They are the elusive treasure. They’re harder to get than a modification and lenders won’t often tell you that. Don’t be discouraged if you go down the path to qualify and get rejected.

Also, most banks will say that you cannot pursue a DIL if you are simultaneously pursuing another remedy such as a short sale or a modification. That means that you’ll have to choose. I prefer that you take a chance at getting a DIL but abandon the process quickly if you feel resistance or that you’re being pulled down a one-way trail. If you invest too much time in pursuing a DIL, you may not have time to pull out and short sale before the bank forecloses for non-payment of the mortgage.

Lastly, banks like to work directly with the homeowner to qualify for a DIL and not a third party representative. It’s something the homeowner has to take on themselves. A homeowner would be wise to seek professional guidance to advise you on the banks requests and responses but handle the task of qualifying on their own.

It means that you still “owe” the unpaid deficiency (just as you owe it today) and that your lender only agrees to release their lien, not their right to pursue further collection. This is normal and ordinary in short sale approvals.

It does NOT mean that they will automatically come after you for payment. It means that they could.

While your lender has the right to pursue you for the difference (the Statute of Limitations in most states allows them to collect on this debt for up to six years) the reality is that after a short sale you’ve just gone to great lengths to prove that you don’t have any money, effectively rendering you judgment proof. Your lender isn’t dumb. They know that it’s unlikely that they’ll be able to collect from you if they obtain a judgment. They also know that, if you are like most borrowers, you will probably file bankruptcy if they sue you. They know they’ll incur significant costs to obtain a judgment only to have it uncollectible or extinguished in bankruptcy. This is not to say they can’t or won’t sue you but that the likelihood is slim. And if they do sue you, your best option would probably be to file bankruptcy to avoid the judgment.

Remember that once you become unable to continue making mortgage payments, you begin to enter a world of bad choices. In that world, I like to say that you would 1) CHOOSE a short sale; 2) ACCEPT a foreclosure; and 3) RESORT TO bankruptcy. I believe that the worst choice you could make would be to continue making your mortgage payment when you can’t afford it and are upside down by tens of thousands of dollars. Be glad that you didn’t make that choice.

It is possible that your lender sells the loan to some debt collector who makes attempts at collecting by threatening to sue you but the threat of a lawsuit is not the same as being sued. Most debt collectors do not sue because it’s not their business model. They don’t see the advantage of wasting time, money and resources on uncollectible debts. Their business model is to use fear and intimidation to scare you into sending money. For example, if your deficiency was $100,000, I’d wager that a debt collector would pay in the neighborhood of $800 to $900 for that delinquent note. If the debt collector can frighten you into paying them $10,000 +/- to satisfy the deficiency, that’s an enormous return. Many people succumb to the threats. If you don’t succumb to their threats, they very often move onto to someone else who will.

If this strategy doesn’t work, they will sue you and you will likely file bankruptcy. If you agree with my position that bankruptcy is your worst case outcome, there can never be a time when they get a judgment against you because you would file bankruptcy after they file a law suit.

The reasons you would strongly consider bankruptcy are because 1) if you owe the money, the lender will likely get their judgment; and 2) a judgment has the same affect on your credit report as a bankruptcy (so you might as well get the benefit of discharging the debt). If you are unable or unwilling to consider bankruptcy, a lawsuit also gives you another opportunity to negotiate a lesser payoff for a full release of the unpaid deficiency.

The bottom line is that the debt and obligation is the same today as it was yesterday and will be for the next six years. Your best choice is to take your “win” off the table, complete the short sale and address the consequences of the deficiency if and/or when the lien holder comes calling (which may never happen). It’s unlikely that you can/will reinstate your loan and return to a monthly performing loan so your choices are to take the short sale or accept a foreclosure. The bottom line is not to let the threat of a deficiency bother you. It’s just another opportunity for the lender to frighten you into sending money. Your only alternative it to continue paying your mortgage on a home where you are significantly underwater with very little hope of property values recovering in your generation.

Another option to consider is that you can try to negotiate a full release of the deficiency after obtaining short sale approval. Most negotiated settlements often usually require a payment of 10% to 20% of the unpaid debt (though sometimes less). It’s nice to consider if you have the money to consider a negotiated payoff. Unfortunately, many homeowners do not have that option.

There is one minor qualifier I’d like to add. If your lien holder is a local community bank or a credit union there is a much higher likelihood that they will opt to sue you for the deficiency. They are generally privately owned by shareholders and cannot afford the losses of defaulted debt. They are also more likely to negotiate an extended payoff such as an unsecured promissory note.

Regardless of any private agreements reached during your divorce negotiations, the short sale will affect you equally if you are both borrowers on the loan. Each and every person who signed the promissory note is equally responsible for the repayment of the debt. The parties cannot extinguish one or the other’s obligation by private agreement (such as a property settlement agreement or divorce decree). The lien holder would never release one party from obligation (that’s why divorcing couples are often required to refinance to officially pay off the joint mortgage).

For purposes of this discussion, let’s assume that the deficiency will be $100K. The lien holder wants to see that the borrowers, all borrowers, don’t have $100K to pay them. If your ex has indemnified you against loss from the mortgage, you might have remedies against him/her under the terms of your settlement agreement but that doesn’t involve, nor concern, the lien holder. The short sale will affect both of your credit profiles and each of you will be equally responsible to the lien holder for the unpaid deficiency.

Whether or not each person is on title doesn’t relieve or release them from their obligation to repay the loan. If someone is not on title, they don’t have to sign the listing agreement or sales contracts but will have to provide financial documents.

If you are jointly obligated and submit financials for short sale approval from only one borrower, the short sale request will be rejected. I often find myself talking to the “surprised” spouse just to share this unfortunate news. The problem is that most divorce attorneys don’t consider what would happen if the obligated spouse couldn’t perform. In a perfect world, they would have required the parties to refinance to clear the ex’s name from the mortgage at the time of the divorce

Wife needs a reality check. If he stops making the payments, everyone on the loan will take a credit hit. This historic economic downturn has affected many relationships. If he can’t pay, he can’t pay. He can continue to pay until he spends all remaining savings and retirement funds but the final result will be that he’s out of money and will be forced to stop paying because he has no other choice.

Better to work cooperatively but if that’s not possible, he needs to do what’s best for him and the children. You can’t do more than the best you can do.

You can ask but it’s not easy to actually get a postponement. Generally, a lender will never consider a postponement request unless you have a ratified sales contract and are actively in short sale negotiations. Even then, more lenders are choosing to foreclose rather than postpone because there are too many bad actors who have submitted fraudulent (made up) contracts just to postpone the sale. Since a lender can’t always tell if the offer is legitimate or not, more and more they are simply rejecting a request for postponement.

If you are actively engaged in a short sale negotiation, it’s always important to try for the postponement.

I feel your pain and frustration. I ask that you try hard not to make this personal as though you’ve failed. If it matters at all, here are some thoughts to consider.

It’s important to remember that once you are unable or unwilling to continue making mortgage payments, you enter a world of bad choices. In that world, I like to say that you would

1. CHOOSE a short sale;

2. ACCEPT a foreclosure; and

3. RESORT TO bankruptcy.

I believe that the worst choice you could make would be to continue making your mortgage payment when you can’t afford it and/or are upside down by tens of thousands of dollars. Be glad that you didn’t make that choice.

When you choose a short sale, you must be prepared to accept a foreclosure because, as you have experienced, there are no guarantees. Sometimes lenders are completely blind to what is in their best interests. They have inflexible policies which punish not only the homeowner but themselves.

We’re experiencing a growing trend with lenders who choose foreclosure instead of short sale because too many bad actors have provided fake or fraudulent contracts for the purpose of stopping foreclosures only to cause unnecessary delays and expenses for the lender. Because lenders can’t distinguish good offers from bad, many have chosen to take a hard line policy of no postponements of scheduled foreclosures.

A subordinate lien is eliminated at foreclosure, except for IRS liens which have a 120 day right of redemption before their lien is extinguished.

Is it possible that the 2^nd trust lien holder is trying to say that the “liability” survives foreclosure (which would be correct). In other words, while the lien might be eliminated, the debt would not be and they could threaten to sue on the unpaid deficiency.

Also, they could be referring to a “Deed in Lieu of Foreclosure”. All liens, regardless of position, pass to a Grantee when title is conveyed via a Deed in Lieu of Foreclosure.

Otherwise, the 2^nd trust lien holder is nuts and making silly, unenforceable threats.

There is usually no benefit to making one missed payment if you’re behind by several (unless you intend to pay all missed payments) because it won’t slow the foreclosure process.

Your house has been listed far too long for a short sale. As you experienced, you don’t have the luxury of time because the foreclosure clock is ticking. It doesn’t matter what you expected the sale price to be, it matters what the market is willing to pay for your home. You cannot languish or delay. If you don’t get the property under a market value contract quickly, you will risk losing it to foreclosure.

Our short sale system has pricing models which are designed to have the property under a ratified contract within 30 to 40 days of listing. Drop the price to a point where you will get offers.

Yes, a foreclosure can still happen even while negotiations are ongoing. The foreclosure department at a lien holder is different from the short sale department which is different from the loss mitigation department which is different from the modification department. They all act independently of each other and usually not in coordination with each other.

If you become aware of a foreclosure date during the short sale process immediately notify your negotiator so they can work to get a postponement based on the current short sale negotiation. While a postponement is possible, there are no guarantees. Unfortunately, the decision to postpone the scheduled foreclosure isn’t usually given until the day before, or the day of, the actual auction. It can be quite an anxious time for homeowners but we recommend that everyone remain patient because the process is unpredictable.

According to the Fair Debt Collection Practices Act, creditors are required to stop calling after being advised BY THE CONSUMER that they are represented by counsel. However, enforcement of those regulations is not very effective. You can register a formal complaint at www.ftc.gov but it’s not likely anything will happen soon enough to stop the calls. Once your name is on a call list, it sometimes takes a little while for the lists to age. Remember, the calls are coming from a call center.

I recommend that you simply be consistent in requesting that they stop and reminding them to call your lawyers. You are doing a short sale. It's not easy or pretty. The lender will continue to use any means possible to cause upset or discomfort because it often causes the homeowner to "act" (usually by sending money). Their efforts are having the desired effect on you because it’s obviously on your mind. Please don't let it bother you.

I know this feels unique to you but millions of homeowners across this country are experiencing the same phenomenon. Short sales have become part of our culture. To the “callers” you are just a name on the list. Don’t take it personally and don’t let it irritate you.

When you stop paying your mortgage you can expect to receive many calls, notices and demands all either asking for money or informing you that bad things are about to happen. The calls and letters usually begin with kindness and assistance and escalate to threats and intimidation. Unless you intend to reinstate the loan to a performing mortgage, most of the letters and notices won’t change your outcome. They are usually required by law or by the terms of the mortgage/security instrument.

Written notices are sent to a homeowner’s last known address on file with the lien holder. You should always open this correspondence immediately to determine if a foreclosure date has been set.

If you are represented by legal counsel in your short sale negotiations, you can safely answer the phone when creditors call and tell them to stop calling and to call your attorney. The Fair Debt Collection Practices Act says “if an attorney is representing you about the debt, the debt collector must contact the attorney rather than you.”

Regarding the letters, there is only one actual “Notice of Foreclosure”. It’s distinct and hard to miss. It will state a date and time certain for a sale at the courthouse. Please immediately notify the law firm or your short sale negotiator if/when you receive that notice and are trying to complete a short sale.

More information on what a lien holder may or may not do when attempting to contact you is available at www.ftc.gov. Enter search phrase “debt collectors”. This is the website for the Federal Trade Commission

We have a tendency to believe that if we can afford the monthly payment then we can afford the loan (and thus don’t have a hardship) and often forget about assets and the principal balance. If you’re upside down on your mortgage, and don’t have enough money to write the check for the difference, you can’t afford your loan. It doesn’t matter if the negative balance is $3,000 or $30,000 or $300,000. If you can’t pay it, you can’t afford it.

Using that example as our guide, you likely have a legitimate hardship. If you were upside down by $50,000, needed to move and didn’t have $50,000 that is your hardship. Your hardship would be, “I’m moving and I don’t have $50,000 to pay the difference between the value of the home and the balance of the loan. I’d like to stay but I can’t. I’d like to pay but, as you can see from the financial documents I’ve provided, I can’t.”

None of us is a prisoner of our home. We can’t be forced to stay if we need to move. The reason for having to move is personal to you and less significant than the fact that you’re not paying your mortgage and can’t afford to pay the difference. You will probably have to cite your reason for moving but I’m sure you probably have a very good reason for moving.

Hardship is one of the most misunderstood concepts of short sales. We’ve only been dealing with the “phenomenon” of short sales since late 2008. There are no standardized rules and less predictability. The process is very fluid and changing constantly. The issue of hardship is one of the ever changing concepts in an ever changing environment of short sales.

In the early days of short sales, hardship was strictly construed by lien holders and it created a hard standard for homeowner compliance. Hardship seemed to be one of the few defined terms in short sales with strict limitations. Today, the concept of hardship is much more fluid because more and more homeowners are defaulting on their mortgage.

In the moment of negotiation with a lien holder, when a homeowner hasn’t been paying their mortgage and the lien holder is faced with a choice of either accepting a market value contract or foreclosure, it’s seldom debated whether the homeowner has a sufficient hardship, or not. The homeowner is not paying their mortgage and is not going to pay their mortgage. If the lien holder rejects a short sale on the basis of hardship it won’t cause the homeowner to have an epiphany to reinstate their loan and begin making their payments again. This is not to say that hardship has become irrelevant or unimportant. It’s just not as strictly construed. A homeowner can’t say that they’re tired of paying their mortgage and don’t want to do it anymore as a basis for their hardship.

We have a tendency to believe that if we can afford the monthly payment then we can afford the loan. We forget about assets and the principal balance. If you’re upside down on your mortgage, and don’t have enough money to write the check for the difference, you can’t afford your loan. It doesn’t matter if the negative balance is $3,000 or $30,000 or $300,000. If you can’t pay it, you can’t afford it.

Using that example as our guide, almost everyone has a legitimate hardship. If you were upside down by $50,000, needed to move and didn’t have the funds to pay the difference…that is your hardship. Your hardship would be, “I’m moving and I don’t have $50,000 to pay the difference between the value of the home and the balance of the loan. I’d like to stay but I can’t. I’d like to pay but, as you can see from the financial documents I’ve provided, I can’t.”

None of us is a prisoner of our home. We can’t be forced to stay if we need to move. The reason for having to move is personal to you and less significant than the fact that you’re not paying your mortgage and can’t afford to pay the difference. You will probably have to cite your reason for moving but we all have a reason for moving.

When applying for a short sale, lien holders request reams of paperwork which essentially asks the seller to prove that they don’t have the ability to pay the deficiency. A hardship letter is one of the required items. In today’s environment, providing a hardship letter is more important for the purpose of allowing the lender to check it off of their list of required documents than it is to substantiate the reason for the short sale. If you have any specific questions about your personal hardship, please feel free to contact us directly.

Delinquent HOA or condo fees must be brought current at closing for title to pass to the purchaser. So, yes, they are typically netted out of the lien holder’s proceeds. As with every other expense, the lien holder weighs the total costs and deductions from their proceeds and determines whether they would be better off accepting the short sale offer or foreclosing. If they foreclose, it will wipe out the lien of the HOA fees against the property.

Be aware that the HOA or condo association may try to sue you to get a judgment against you for non-payment. Many associations are doing this in an effort to fight back and send a message to other property owners NOT to default on their dues payments.

Whenever possible, I recommend that you keep paying condo/HOA dues during a short sale because failure to pay has an immediate negative impact on your neighbors. Communities rely on dues to provide and maintain services and facilities. In addition, many communities are beginning to fight back against defaulting homeowners by proactively suing them for a judgment before the short sale or foreclosure is completed.

If you are unable to afford to continue paying condo/HOA dues, then the other reasons don’t matter. Always make the decision that is best for your family first, your neighbors next and your creditors last.

We LISTEN. It’s a rare but effective strategy. We can’t begin to know how to help you unless we understand your unique circumstances and needs.

Whether you are unable to continue making your mortgage payments or realize the absurdity of “renting” your home because you are upside down by 20% to 70%, there comes a moment when you have to ask yourself how to manage this crisis. In that moment of truth, there are only seven available exit strategies:

1. Loan Modification
2. Refinance
3. Deed in Lieu of Foreclosure
4. Short Sale
5. Foreclosure
6. Bankruptcy
7. Status Quo. Don’t change anything. Keep doing what you’re doing.

Many advisors will encourage you to choose what is best for them regardless of whether or not it’s a good choice for you. We’ve learned that most don’t do this with harmful intent (although many do) but rather they offer you their solution because they aren’t familiar with other solutions.

We will never force a choice on you. We will listen to your special circumstances and guide you to the choices that might work best for you. Making the wrong choice could cause long term harm. Making the wrong choice got you into this problem. Let’s try not to make that mistake again.

Once we understand your needs, we can suggest solutions and introduce you to the professionals that can best help you. There is no “one size fits all” plan.

A landlord has a lease agreement with the tenant. For purposes of this discussion, let’s assume it’s a standard lease agreement. The lease is a contract between the landlord and the tenant, not any third parties (like the landlord’s bank). The terms of the lease will set forth the duties and obligations of each party. Assuming a standard lease, the tenant has a right to possession during the lease term. If the landlord sells the property during that time, the transfer of ownership is subject to the tenant’s right of possession. If the landlord is foreclosed upon during the lease term, the lease contract (and all obligations of each party) is severed.

The tenant has a duty to pay the rent to the landlord during the lease term. Any attempt to not pay the rent or to pay anyone else (like the seller’s lender or to an escrow account) would likely be in violation of the lease agreement. If the tenant chooses to not pay the landlord, the landlord’s remedies are set forth in the lease. Presumably, the landlord would have a right to sue the tenant for breach (assuming the landlord can afford the litigation).

If the landlord chooses to sell the property during the lease term I presume that the lease gives them the right to do that. Obviously, the tenant would need to cooperate and allow reasonable access to accomplish a sale. The level of tenant’s cooperation could directly affect the landlord’s ability to sell and/or obtain a market rate purchase offer. So, regardless of what the lease says, gaining the tenant’s cooperation is critically important in determining whether to sell or not.

On the other side of the issue is the agreement between the homeowner and their mortgage company. They also have a contract called a promissory note. The terms of that agreement generally require the borrower/homeowner to make regularly scheduled payments. If the homeowner/borrower fails to honor that agreement, the lender has remedies as spelled out in the note. Generally, this includes demand for payment and foreclosure (regardless of whether there is a tenant in the property).

A breach of the promissory note should not constitute a breach of the lease agreement (assuming a standard lease agreement). They are unrelated issues. Within the terms of most lender contracts (promissory note and deed of trust) is an assignment of rents provision. Generally that says if a borrower/homeowner is collecting rents while having an obligation to make scheduled mortgage payments that the lender has a right to receive those rents to offset the payments due under the note. The lien holder is entitled to add the collect rents to any borrower deficiency in a short sale or foreclosure. But, as we’ve said in other matters, a deficiency is a deficiency and the circumstances will determine whether the lien holder will take action to collect. Does it really matter to a homeowner if their deficiency is $90K or $105K? It probably doesn’t.

In summary, if the tenant chooses to not pay the rent as agreed, the landlord has remedies described in the lease agreement. If the homeowner/borrower chooses to not pay the mortgage, the lender has remedies describes in the promissory note and deed of trust. One does not, and should not, impact the other.

Tax consequences for "canceled debt" are the same whether the debt is from foreclosure or short sale or whether the property is an investment property or principal residence. It simply means that the lender was paid less than they were owed for an obligation.

The exemptions from tax may vary from investment property to personal residence but a 1099 will be issued in all circumstances where the borrower pays less than the full amount due.

The rules for canceled debt for more completely set forth in IRS Publication 4681 which is available through our website or by clicking this link.

Proceed with caution. The challenge with selling any investment property is that you need the compliance and cooperation of the tenant in order to provide reasonable access to prospective buyers. You will have greater success with kindness than with harsh demands. It’s possible that they will have to be asked to leave before the expiration of the lease term. Since you can’t force this on them, you’ll have to motivate them to accept that possibility.

Since you’re short selling, you’re probably not making mortgage payments to your lender. If the tenant is especially difficult, you may want to consider a financial incentive such as returning their security deposit early or allowing an early termination of the lease or forgiving the last month’s rent in exchange for a cooperative attitude.

I have known landlords who dealt harshly with their tenant and paid dearly. The tenant became uncooperative and it was not possible for the buyer to get appraisers, inspectors or lender’s representatives access to the property. They ended up in foreclosure instead of short sale because they could never gain the tenant’s cooperation.

Here are some realities to consider about loan modifications:

1. It is very difficult (nearly impossible) to negotiate a loan modification without being delinquent on your payments. You will have to stop making your payments and this will affect your credit and start the clock on a countdown to a foreclosure. If the modification is not approved (or takes too long), will you be able to pay all the delinquent payments and reinstate the mortgage? If not, you may face a fast approaching foreclosure with no opportunity to short sell.
2. The application process for loan modifications often takes 4 to 6 months.
3. Even if you successfully negotiate a loan modification, (which is difficult to do) it would almost certainly NOT LOWER your principal balance. At best, it would only provide short term payment relief for a negotiated period of time. Too often, modifications are simply a rain check against a future default.
4. As rare as loan modifications are to get, most people who get them wonder why they bothered because it doesn’t provide any long term solutions.
5. As difficult as it is to obtain a loan modification, it’s nearly impossible to get a modification on a 2nd trust. Will your situation be improved if you are able to lower the payment on the first and not the second?
6. You cannot do a loan modification while your home is for sale or in short sale negotiations. You’ll have to choose one or the other.
7. Modifications are a good idea in theory but rarely the best solution in practice (either short term or long term). Unless, or until, loan mods can lower the principal balance, they are unlikely to provide much help in keeping people in their homes.

Yes, it can be a very good idea for both buyer and seller. Unlike a traditional real estate transaction where a seller assumes great risk when allowing a buyer to occupy prior to closing, it is the buyer who assumes the greater risk when occupying a short sale property prior to closing. There is no guarantee that the short sale will be approved which could cause the buyer into a second move. The seller has significantly less risk when allowing the buyer to pre-occupy during a short sale because they have effectively abandoned all future interests in the property anyway.

Here’s what a buyer should consider when contemplating pre-occupancy of a short sale. The only reason to consider moving into a short sale home early is because it is better than any other alternative available to the buyer. Either the buyer has to move from their existing residence or they need to be relocated by a date certain (for school or job purposes) or they just want to lock up the opportunity to be the preferred buyer because they love the home. If they have reason to believe that their offer is a market value offer and that the “probability” of a successful short sale is higher than normal, they might benefit from moving into the home.

The worst outcome is that the short sale fails and the home is foreclosed. If the buyer and seller enter into a market term lease making the buyer a tenant of the property, any subsequent owner at foreclosure must give the tenant in possession at least 90 days to vacate after notice (in the case of a month to month lease) or allow the tenant to live out the term of the lease. This is according to the Protecting Tenants at Foreclosure Act of 2009. With a valid lease, the buyer won’t be forced to make any sudden moves.

Once a buyer is in possession, the short sale negotiations are much easier because there is not the pressure of a deadline. Both buyer and seller should be able to wait out the process. If the buyer is concerned about the cost of a second move, the parties should consider paying the rents into an escrow account subject to the final closing. If the short sale closes, the seller would be entitled to the rent because they would have “performed” under the lease terms. If the home is foreclosed, the paid rents can be refunded to the buyer to offset the cost of relocating.

A seller would benefit from having the home occupied. They would not be responsible for utility costs and would have to worry about their lender securing the home because it’s vacant. The lease and the sales contract should be clear that the buyer/tenant accepts the property in as-is condition upon possession.

This is not unusual. Lenders have the right (under the terms of the Deed of Trust or mortgage) to inspect their secured properties and to take affirmative measures to prevent damage to the property. If vacant, most lenders will want to take possession, winterize the property (turn off utilities) and re-key the house. If this happens, you are entitled to a key (as the owner) but it’s a real hassle to get a key from the lender and then the utilities will stay off until closing. It is preferable that the lender NOT rekey the house.

The only ones who can possibly prevent this is either you or your listing agent. The notice you received probably contains a phone number to contact the inspection company who discovered the vacant home. The inspection company needs to be called and told that the home is currently being short sold and is under contract with an ongoing short sale negotiation. They need to be assured that either the homeowner or the listing agent is regularly checking on the property to preserve its current condition.

While they do not have to grant your request to not rekey the property, they often do grant the request if the call appears sincere and legitimate. Lenders incur extra expense from winterizing homes and like to avoid the cost if possible. As you’ve learned, nothing is predictable or reasonable. Be prepared for any outcome. If they do rekey, it’s not insurmountable, just another inconvenience to deal with.

BPO stands for Broker's Price Opinion. In an effort to have an estimate of property value, lien holders hire Realtors to physically inspect a short sale or foreclosed property and prepare a BPO. As a practical matter, BPO’s often fail to reflect the real market value of the property because the brokers that are hired to prepare these opinions are not paid much for this service and typically are not experts in the geographic area where the property is located. BPO values are truly one of the great mysteries and absurdities of the short sale phenomenon.

Yes, you may represent both sides of the deal. The bank is less concerned with that than they are with making sure the value of the offer is a reasonable, market value. If it’s a legitimate market value offer, you’ll have no problem.

This assumes that you are not the seller/homeowner. Banks will not pay a commission to the seller in a short sale.

As an estate sale, I assume that the homeowner was the only borrower on the loan. As he/she is deceased, it means that the lien holder has no recourse other than choosing foreclosure or accepting a market price short sale. Nobody’s credit will be affected and no beneficiary needs to worry about a deficiency judgment.

In the short sale negotiations, the negotiator will simply need to provide a copy of the death certificate which could affect the negotiations in one of two ways. It will either expedite negotiations (because the lender realizes that the borrower is deceased) or make the negotiations go on longer than necessary (because the transaction is outside of the lender’s normal protocol and they don’t know how to process it).

On the lighter side, death is the ultimate hardship!

If you learn only one thing from visiting us I hope it’s that you allow yourself to be free of guilt and shame over your circumstances. We are in the midst of the greatest economic downturn in our history as a nation. I don’t believe you are personally responsible for turning our economy upside down nor do I think you are personally responsible for dropping property values 20% to 70%. If you are somehow responsible for our economic crisis, please contact me directly for a different response to this question.

The only thing you are really guilty of is BAD TIMING. You probably purchased or refinanced your property in 2005, 2006 or 2007. Take a moment and imagine how different your life would be if you had purchased or refinanced in 2002 or 2003. Things would be very different, wouldn’t they? It’s just bad timing not bad judgment.

It would be great if you could just wait this out and allow the economy to recover and property values to recover. Everything would be good again. But that’s not realistic. Even the most liberal economic forecasts believe housing values won’t return to their prior levels for 10 years, many economists believe it could be as long as 20 years. Very few of us have the luxury of time to wait long enough to experience full recovery.

Time is a diminishing asset. As we age, time becomes more valuable because there is less of it. The sooner you recognize your circumstances, the sooner you can take steps to change it and the sooner you can begin the process of recovering from it.

If ever there was truth to the notion that there is safety in numbers, you can feel safe in the knowledge that millions of homeowners share your pain and your circumstances. I do not wish to make light of the problem but let’s recognize it for what it truly is. This is “where” you are in life and not “who” you are in life.

Yes, there is one sure fire solution to keeping your pride and integrity without damaging your credit. Keep making your mortgage payment every month, on time and until the loan is paid off. It’s that simple.

For most of us, that’s simply not an option. If it’s not an option for you, read on.

If you are upside down in value (meaning that your home is worth less than you owe), you are renting your home. Do you mind if I repeat that? If you are upside down in value, you are renting your home.

Pride, commitment, honor, duty and obligation are all very deeply rooted core beliefs (and rightfully so) that interfere with our ability to make objective choices which might be best for our personal well being and that of our family. If this were a business decision, and not a personal choice, what would you choose?

Our sense of duty and obligation is so strong that many of us will borrow from credit cards, draw from savings or retirement accounts (don’t EVER do that) or borrow money from family and friends in order to make the mortgage payment. We don’t realize that digging the hole deeper will not help us get out of our hole. The first rule of recovery when digging a hole is to STOP DIGGING!

When you are deeply upside down in property value you must realize how long it will take for your property value to return to its pre-recession levels. If you have lost more than 25% in value, it’s not likely that your home will return to its prior value in our generation. Think about that. It could take an entire generation for values to restore themselves above the amount that you owe on the property. Remember, also, that if your home is upside down by 30%, the housing values must recover 60% for you to realize the 30% recovery.

That means that you can’t out save this economic downturn. You can’t out live it. You can’t out last it. Every dollar you spend on your mortgage, when significantly upside down, is a dollar that will not be returned. That same dollar will not provide value to you and cannot be spent on your family.

Banks/lien holders are very conscious of our private guilt and our need to honorably fulfill our commitments. They would prefer that we listen to our inner conscience and not default even if it’s not in our personal best interest, or that of our family.

As a practical matter (putting pride and integrity aside), we intellectually rationalize that it’s important to continue paying the mortgage in order to preserve our credit (which is a false belief). Please refer to credit consequences of a short sale for more information.

I acknowledge your sense of pride and integrity. However, if your home value is upside down by 20% or more, and you plan on selling in the next 10 years, a short sale is very likely in your future. You don’t have to choose it now but you’ll probably find yourself choosing it later, regardless of your sense of personal pride.

That’s easy. Homeowners struggle to with an enormous sense of shame, embarrassment, loss of pride, personal responsibility and personal failure.

These emotional responses interfere with a homeowner’s good judgment and ability to make informed decisions which are best for them and their family.

We encounter the issue of security clearances every day. I want to start by saying that we’ve worked with hundreds of individuals owning a security clearance and none of them has lost their clearance because of their short sale.

The best approach is for you to understand what your credit means to your security clearance.

You were approved for a security clearance because you passed a strict review of your performance, choices, judgment and behavior over measured periods of time, both short term and long term. The level of security clearance dictated the thoroughness and extensiveness of the review. Credit is just one of many variables considered as part of the normal inquiry process to a security clearance. Why is credit a variable in determining eligibility for a security clearance?

Credit is a consideration in approving your security clearance because it provides insight into your performance, choices, judgment and behavior over measured periods of time. It allows a reviewer to predict whether you would be vulnerable or susceptible to undue outside influence (such as bribery or extortion) based on a historical demonstration of bad performance, choices, judgment and behavior.

You are likely facing a short sale NOT because of your bad judgment or decision making but because of a historic economic recession causing a significant drop in property values which you didn’t cause. If you are like most people, your greatest offense is that you bought or refinanced at the wrong time (2005, 2006 or 2007). I don’t believe you are personally responsible for our economic downturn or our drop in home prices. If you are responsible, we need to have a different discussion.

The importance is that your pending short sale and credit issues are NOT OF YOUR CAUSING and provide no predictive value into your judgment and decision making. In fact, for purposes of a security clearance, I would argue that if you didn’t get rid of this mortgage you would find yourself in a financially unstable position which would make you vulnerable to bribery and extortion. As such, short selling the home and getting out from under the burdensome debt demonstrates good judgment and decision making, not the opposite. The individuals with oversight control of your security clearance know this. Millions of homeowners have had to short sell for the same reasons (not of their causing) and your employer has a policy for how to handle this.

My recommendation is that you directly approach your supervisor or HR department and tell them that you have to sell your home, that your property is upside down in value and that it’s going to be a short sale. Tell them that as a condition of the short sale you’ll have to stop mortgage payments. Share with them that the stopped payments and the short sale event will negatively affect your credit and you don’t want that to impact your security clearance. Ask for guidance and suggestions on how to handle this difficult issue.

You will likely be told that that it’s OK and receive their policy on short sales. They will have a policy. You’re not the first and you won’t be the last. The policy will probably require you to simply keep them informed along the way. That’s it. If the short sale request fails and the property goes to foreclosure, it still should not affect your security clearance because you can’t control the outcome. You should only be required to demonstrate that you did everything possible under difficult economic circumstances (not of your causing) to manage the outcome to minimize all parties risk and loss.

Imagine if you approached your employer to tell them you could no longer afford your mortgage or that you had to sell and didn’t have the ability to write a big check and they responded by telling you to tough it out and make it work or risk losing your security clearance. It doesn’t happen because not only would that be heartless and insensitive but possibly actionable. Also it’s likely that 20 to 40% of all folks with a security clearance would be at risk of losing the clearance and not being able to provide services to the employer.

When unable to pay your mortgage or facing a short sale, the decisions are difficult enough without having the added pressure of protecting your security clearance. You need to get comfortable with your employer’s position in order to think clearly enough to make tough choices.

Don’t overcomplicate this issue. Go see your employer, supervisor or HR department and get the assurances you need. If you wish to discuss your personal and unique circumstances, please contact us for a private consultation.

She is willing to do a short sale but I'm not sure she will have to. She needs to sell for $240K to break even. It was under contract for that amount in the spring and fell through. Should I put her property on the market for a fixed period of time as a regular sale and then if it doesn't sell within a certain timeframe, cancel the listing, and then start the short sale process?

I think the answer depends on how long the homeowner can continue to make mortgage payments, or not. If she can make the payment, and wishes to continue doing so, it doesn’t hurt to try the market at a price that can pay the lien holder in full.

If she can’t make the payment, she is “on the clock” because the principal balance will continue to grow with each non-payment and the lien holder will eventually begin foreclosure proceedings.

A short sale is a short sale whether the deficiency is $2,000 or $200,000. If the homeowner doesn’t have the money to continue making payments or to write the check for the deficiency, she may as well admit her outcome and get it going full steam.

Lien holders are far more interested in liquid assets than in non-liquid assets. The only non-liquid assets they might remotely be interested in would be if you have a significant amount of equity in another home. Significant equity is considered 2x the deficiency amount of the unpaid mortgage. Don’t worry about equity in vehicles or furniture. Lien holders won’t be very interested in that (unless the car has more equity than the deficiency).

The only way to avoid foreclosure is to make sure that the loan payments are current and that all future payments are made on time and as agreed. Almost every homeowner in the short sale process doesn’t have that option. They either can’t afford to make their mortgage payment or they realize the futility of continuing to make their mortgage payment.

It’s important to remember that once a homeowner is unable or unwilling to continue making mortgage payments, they enter a world of bad choices. In that world, I like to say that homeowners would

1. CHOOSE a short sale;

2. ACCEPT a foreclosure; and

3. RESORT TO bankruptcy.

I believe that the worst choice a homeowner could make would be to continue making their mortgage payment when they can’t afford it and/or are upside down by tens of thousands of dollars. Homeowners should celebrate NOT making that choice.

When a homeowner chooses a short sale, they must be prepared to accept a foreclosure because there are no guarantees. Sometimes lenders are completely blind to what is in their best interests. They have inflexible policies which punish not only the homeowner but themselves.

We’re experiencing a growing trend with lien holders who choose foreclosure instead of short sale because too many bad actors have provided fake or fraudulent contracts for the purpose of stopping foreclosures only to cause unnecessary delays and expenses for the lender. Because lien holders can’t distinguish good offers from bad, many have chosen to take a hard line policy of not postponing scheduled foreclosures.

You are applying standard, traditional, sensible and effective reasoning to a short sale and it doesn’t work like that. Nothing in a short sale acts like it does in a traditional resale transaction. People buy a short sale because of price. That’s it. If your property hasn’t sold, it’s not because the open house didn’t go well, or flyers weren’t distributed or the wrong person showed the property or any other reason other than price. As with many false realities in this process, you have to get used to the idea that this is different and treat it as though it were different.

If you can’t do that, this process will drive you crazy. You will continue to be frustrated and look for reasons to explain your frustration in all the wrong places. If someone hasn’t bought your property yet (with a complete ratified contract) it’s only because the price wasn’t attractive enough. Trust me on this. If you hit the right price, everyone will want your property.

It’s also not like a traditional transaction because you don’t have the luxury of time. You’re not making payments. If you don’t drop the price to get a contract, they’ll set a foreclosure date and it’ll be too late to do anything about it.
You’re doing a short sale. I encourage to actively and regularly drop the price until you get a market contract!

This is always a tricky question because general answers are dangerous when the terms are unique to the situation. This is where it is especially important for a seller to be represented by legal counsel so they can get proper guidance on what options they have and how to respond.

Sometimes lien holders ask for promissory notes just as a negotiation tactic. A simple NO will put that issue to rest. While NO could lead to a rejection of the short sale offer and possible foreclosure, the seller has to weigh the consequences of foreclosure against the amount of the promissory note (and length of repayment).

For example, if a seller were being asked to sign a note for $45,000 over 10 years, they’d have to consider the consequences of foreclosure. Generally, foreclosure will affect an individual’s credit for 3 to 4 years where a short sale will affect an individual’s credit for approximately 2 years. Is an extra two years of not having credit worth $45,000?

Here are some important questions and issues to consider when a lender proposes a promissory note:

1. The negotiator should insist on seeing a copy of the actual note before a yes or no decision can be considered. A promissory note contains many more terms than just principal amount, interest rate and number of years. Primarily, a seller will want to know if the note contains a confessed judgment provision. That would mean that the note holder can record a judgment upon default without due process of law or legal proceedings. Notes with confessed judgment provisions are usually not favorable to the seller and not recommended.

Many lenders will say that the note isn’t available and won't be prepared until just prior to closing. If the seller is represented by counsel, their attorney will remind the lender that as a law firm they cannot advise the seller without knowledge of all of the terms and conditions. The lien holder can be asked if they plan to use a standard note form and, if yes, they should be asked to forward a copy of the blank note so that the terms can be reviewed.

2. Ask the lien holder if the execution of the note relieves the seller of all remaining liability and/or deficiencies. Depending on the other terms, release of liability could be a reason why a seller might want to sign the note.

3. If the seller agrees to sign the note, what exactly will be reported to the credit bureaus? Sometimes a note is a modification of the original loan terms so the lien holder should not report it as a short sale.

4. If the seller does not agree to sign the note, is it the lien holder’s final position that they will NOT approve the short sale and will instead proceed to foreclosure?

When a lien holder requests a note, it’s often because they believe the seller has assets and/or the means to pay. Review the bank statements and/or tax returns to see if the lender has reason to believe the seller can afford to pay. If the answer to this is YES, the seller may be subject to a deficiency lawsuit if they don’t agree to the note. In that case, it may be in the seller’s best interests to sign.

HAFA (the Home Affordable Foreclosure Alternative program) is a subset of the HAMP (Home Affordable Modification Program) which has been a complete disaster. HAFA is a guideline, not a rule. Lender participation is voluntary. There are no enforcement mechanisms for non-compliance. As of this writing, HAFA hasn’t been around long enough to have any empirically reliable data or statistics. We just know that there aren’t very many homeowners who have successfully completed the HAFA short sale program and, yes, it does take longer. HAFA is theoretically a good idea, but in practice it doesn’t work so well because lien holders are reluctant to approve homeowners with a release from liability for the $1,500 to $3,000 government subsidy. They just won’t tell you that in advance because it helps them to have as many homeowners “in the HAFA program” so they can show good faith compliance with the Treasury Department.

In most cases lender of record is just the servicer and not the investor/note holder. That means they aren’t the ultimate decision maker on the release of liability. They are only the “conduit” to the investor. Generally only about 20% of deficiencies get released by asking. You can attempt to negotiate a full release for some nominal payment of the deficient amount (such as 10%). Mostly, we take the position that a deficiency doesn’t really matter because the homeowner usually proves through the short sale process that they DON’T HAVE ANY MONEY, making them essentially judgment proof. Lien holders know this, which is why you don’t often hear of lenders pursuing homeowners for the deficiency.

There is a statute of limitations not longer than 6 years on the lender’s ability to come back against the homeowner. The question is whether they will ever try to come back.

If the thought of having a deficiency worries you badly, it might be worth it for you to apply for HAFA. One risk is that the process could likely take longer. Longer negotiations often result in the buyer leaving or the lien holder might begin foreclosure proceedings because too many missed mortgage payments have accrued.

My opinion is that the deficiency issue might not be as troublesome as you fear. You already owe the debt. It’s not as if the deficiency is a new debt that you will owe. I presume that you not making his mortgage payments and I don’t think you will reconsider, reinstate the loan and make timely payments if the lien holder doesn’t release you from liability of the deficiency.

Yes. First, homeowners need competent legal advice on complicated issues. Sellers need guidance on credit issues, deficiency judgments, income tax consequences, foreclosure concerns, bankruptcy and more. Realtors are not trained in these matters and should never provide legal advice.

Secondly, the attorney/client privilege provides many benefits when negotiating confidential financial matters that cannot be matched by non-attorney negotiators.

Next, sellers who have stopped paying their mortgage receive endless threats and intimidation by phone and mail from their lien holder. The law firm counsels sellers on the severity and risks of the communications. When represented by counsel, sellers can safely answer the phone when creditors call and tell them that to stop calling and to call their attorney. The Fair Debt Collection Practices Act says “if an attorney is representing you about the debt, the debt collector must contact the attorney rather than you.”

Lastly, lien holders often respond differently to a law firm during negotiations then they do to a non-lawyer negotiator.

Once negotiations are started, it’s a bad idea to switch negotiators. It will likely cause the lien holder to start over. If you already invested a lot of time with the same buyer, it’s not advisable. It’s best to work with you negotiator to get this deal through if at all possible. I’ll be happy to be a sounding board and advisor but I don’t recommend that you change negotiators midstream.

We want to know what will happen if we don’t have approval in time to satisfy the contract closing date. The buyer seems to be getting impatient.

When buyers set "deadlines" in short sale transactions, those deadlines are fairly unrealistic because no one can really know how long the negotiations will or won't take. The deal will take as long as the lien holder wants it to take. Any buyer who has a deadline whereby they must close or take possession by a certain date should not be buying a short sale….any short sale. They shouldn’t buy your home or anyone else’s.

Buyer deadlines are fictional. If a buyer wants to leave, it is their choice. You can wish they wouldn't leave but you can't stop them. You'll just have to get another buyer. There are plenty of buyers at the right price. In order to get a short sale approval, you’ll need a patient and cooperative buyer. That's why buyers who lose their patience have to be allowed to leave peacefully.

The real problem is that in short sale negotiations there are no rules or guidelines. Nothing is predictable and the only thing that is certain is that the entire process will be uncertain. I've learned through this process that a successful short sale is one that hasn't been foreclosed yet. Unless the home has been foreclosed, the deal is still in play and subject to approval.

None of this is meant to sound cavalier or unsympathetic to the unique circumstances of your transaction. It's simply recognition of how short sale negotiations work. For short sales to succeed, all parties need to properly set their expectations.

No, not usually. When negotiating a short sale, the lien holder is primarily interested in two issues. First, does the seller have the liquid assets to pay the remaining deficiency and second, is the offer a market value offer (meaning can they make more money if they foreclose).

Generally, buyers who pay cash do so because they want a bargain price and believe it gives them negotiating leverage. I don’t blame them. In a market of depressed housing values, they have a right to expect a discount for cash. However, lenders know this. Inherently, lien holders believe that cash offers are below market value offers. As a result, lien holders almost always believe properties are worth more than the cash being offered and counter with a request for a higher sales price.

Cash offers don’t come with an appraisal from the buyer’s lender. Without an appraisal from the buyer’s lender, a negotiator is at the mercy of the lien holder’s valuation without any way of countering their assessment. In order to determine if their price opinion is valid, a negotiator has to invest hours of time to move the file through the system just to get a counter offer from the lien holder. I can cite dozens of examples where lien holders have ridiculous expectations of value. The tool of the buyer’s lender appraisal takes opinion out of it and can show a legitimate basis for the offer.

Time is of the essence in short sale negotiations. While negotiations are ongoing, the seller is not paying their mortgage. The seller is at risk with a cash offer because their house is off of the market while the clock is ticking toward foreclosure. The listing agent is being asked to work with a contract that has a 50/50 chance of approval (at best) and the negotiators are being asked to invest hours of time in a transaction that offers little in the way of negotiating leverage.

I’ve often said that short sale strategies are counter intuitive to traditional transactions. It’s not often a seller would consider rejecting a legitimate cash offer but if their home is a short sale, they should strongly consider passing.

If the cash buyer really wants the property, encourage them to write an offer with financing, provide a loan approval letter, obtain an appraisal and pay cash at closing if they wish.

It depends on whether you mean practically or emotionally. For purposes of this answer, I’m going to assume that the homeowner has stopped making their mortgage payments (or is considering stopping their payments).

Practically speaking, a homeowner can reinstate their loan anytime they want prior to foreclosure. This would require payment of penalties and late fees. This choice would work best if done prior to the ratification of a purchase agreement with a Buyer.

Realistically, I’ve never known a Seller to reinstate their loan after having stopped because either they can’t or they’ve accepted the futility of their circumstances. As a result, the point of no return “emotionally” is when the Seller summons the courage and conviction to stop making their payment and accept the consequences. It’s in this moment of truth that a homeowner realizes that any of the bad consequences that await them are better than continuing to make their mortgage payments on a home that is more than 20% upside down in value.

Oversimplified, the unfortunate answer is….yes. In reality, this very difficult choice is personal and must only be made after careful consideration of all the benefits and consequences. First I’d like to address the personal and emotional challenges of this issue.

We often feel compelled to continue making mortgage payments even when we can’t afford to continue any longer. Pride, commitment, honor, duty and obligation are all very deeply rooted core beliefs (and rightfully so) that interfere with our ability to make objective choices which might be best for our personal well being and that of our family. If this were a business decision, and not a personal choice, what would you choose?

Our sense of duty and obligation is so strong that many of us will borrow from credit cards, draw from savings or retirement accounts (don’t EVER do that) or borrow money from family and friends in order to make the mortgage payment. We don’t realize that digging the hole deeper will not help us get out of our hole. The first rule of recovery when digging a hole is to STOP DIGGING!

When you are deeply upside down in property value (meaning your home is worth less than you owe), you must realize how long it will take for your property value to return to its pre-recession levels. If you have lost more than 25% in value, it’s not likely that your home will return to its prior value in our generation. Think about that. It could take an entire generation for values to restore themselves above the amount that you owe on the property.

That means that you can’t out save this economic downturn. You can’t out live it. You can’t out last it. Every dollar you spend on your mortgage, when significantly upside down, is a dollar that will not be returned. That same dollar will not provide value to you and cannot be spent on your family. If you are upside down in value, you are effectively renting your home.

Do you mind if I repeat that? If you are upside down in value, you are renting your home.

So when choosing whether to continue making mortgage payments you have to first decide what value you receive in return, if any?

As a practical matter, we intellectually rationalize that it’s important to continue paying the mortgage in order to preserve our credit (which is a false belief). Please refer to credit consequences of a short sale for more information.

In addition, it is virtually impossible to get your bank/lien holder to approve a short sale request if you are still current on your payments. Not completely impossible, just virtually impossible. From their perspective, non-payment is a default. Why would they help you to default on their mortgage? They wouldn’t.

Banks/lien holders are very conscious of our private guilt and our need to honorably fulfill our commitments. They would prefer that we listen to our inner conscience and not default even if it’s not in our personal best interest, or that of our family.

Beyond our feeling of personal duty and obligation, most of us want to continue to pay our mortgage to save our credit. In reality, your credit is being damaged by the event of the short sale. If you complete a short sale, the damage to your credit will happen whether you make your payments, or not (see the answer on how stopping payments affects your credit for more details).

As a result, there is no intellectual reason for advising anyone to continue making their mortgage payments if they are committed to doing a short sale as a means of escaping from their current mortgage crisis. As with everything, the choice is yours.

If the taxes and insurance are included in the PITI mortgage payment, there is no need to pay anything additional, even after stopping mortgage payments. The lien holder has assumed the obligation to pay taxes and insurance and will continue to do so. If the payments exceed the actual money in the escrow account, the amounts will be advanced by the lien holder and will be added to the principal balance owed by the borrower/homeowner.

If the taxes and insurance are paid SEPARATE from the mortgage payment (not included in the payment), the homeowner should continue to pay the insurance premium if at all possible just in case any disastrous event happens to the home.

Unfortunately, there is no “one size fits all” answer to whether or not they should continue paying the taxes. Generally speaking, the taxes (and all delinquencies) will be paid out of the lien holder proceeds at the short sale closing in order to deliver good title to the buyer. If that happens the homeowner will not need to pay the taxes directly. The exception to this advice is if the taxing authority attempts to obtain a judgment against the homeowner to force payment. This usually occurs when two or more scheduled tax payments are missed.

Always avoid getting a judgment, if at all possible. Of course, this all presumes that the homeowner has a choice to pay or not to pay. I always recommend that family comes first. Take care of the family’s needs and if there are sufficient funds left to pay the insurance and/or taxes, follow the advice given. Otherwise, you can only do the best that you can do.

Generally, the IRS should agree to release their lien without payment once they’re satisfied that there is no equity in the property. That doesn’t mean they forgive the obligation. It only means they release the lien.

If they refuse to release without payment, it should be treated as any other subordinate lien and a request must be made from the 1^st lien holder for an allowance to pay something to release the subordinate lien (such as $3,000). The IRS will certainly release their lien for some token payment when the property has no equity.

Also, an IRS lien sometimes provides a negotiating advantage in short sale negotiations because the IRS has a 120 day redemption period on all foreclosures. This means that if a bank forecloses, the successful bidder cannot resell the property for at least four months after the foreclosure while they wait for the IRS redemption period to run. This often allows an informed negotiator to leverage the short sale negotiations by reminding the foreclosing lien holder that a short sale is definitely in their best interest.

Let me begin by saying that the complete answers to your question are found in IRS Publication 4681 which addresses the issue of canceled debt. It’s an easy to read 24 page publication and I recommend that all homeowners considering a short sale or foreclosure read it for full details. Here is a link for easy access: IRS Publication 4681.

Now, allow me to give a brief summary of the critical points covered in IRS Publication 4681 when dealing with short sale tax consequences.

Whenever a borrower pays a creditor less money than they are owed on a debt, the creditor is required to file a 1099-C (for canceled debt) with the IRS. These rules are the same whether the property is short sold or foreclosed. It doesn’t matter how long you’ve lived in the home. Those guidelines don’t apply to the canceled debt tax rules. The most important thing to remember is that a 1099 is always issued when a borrower pays a creditor less money than the borrower owes on the debt.

On the surface, the issuance of a 1099 creates a taxable consequence. This is true whether the home is an investment property, principal residence, second home or otherwise. IRS Publication 4681 identifies three exclusions (or exemptions) from the obligation to pay tax on the canceled debt. They are:

1. Bankruptcy
2. Insolvency
3. Qualified Principal Residence

Bankruptcy is self explanatory. If the borrower files bankruptcy BEFORE creating the taxable event (short sale or foreclosure), the underlying debt is extinguished so there is no canceled debt because the debt no longer exists. You can’t pay less than you owe on an amount you no longer owe. Bankruptcy is available to everyone whether your property is a principal residence or an investment property.

Insolvency means that at the time of the event (short sale or foreclosure), the borrower was insolvent as defined by IRS guidelines. That means their liabilities exceed their assets. This would describe MOST (but not all) homeowners in a short sale situation. Publication 4681 includes a one page insolvency worksheet that a homeowner can use to schedule their liabilities (as defined by the IRS) and their assets (as defined by the IRS) to determine if the bottom line value is positive or negative. If the amount is a negative number, larger than the amount of the canceled debt being reported on the 1099, they are insolvent and the homeowner would be exempted from paying any taxes on the 1099 amount. Insolvency is available to everyone whether your property is a principal residence or an investment property.

Qualified principal residence indebtedness is only available if the property is your principal residence. It means that the original purchase money mortgage amount is exempted but any subsequent refinance or increase in the original mortgage amount would not be exempted unless the homeowner can demonstrate that “cash out” money borrowed in excess of the original purchase money mortgage was reinvested in the property for renovations, repairs or improvements. For example, if I purchased a home with an original mortgage of $400K, I would have a $400K exemption on canceled debt in a short sale or foreclosure. But if, after the original closing, I refinanced or took out a 2nd trust so that my new mortgage balance was $500K, I would NOT be exempt on that new $100K UNLESS I could prove that I used that money to make renovations, repairs or improvements to the home. If I used the new money for anything other than directing it back into the home, the “cash out” portion is taxable.

It’s also important to understand that in order to use the qualified principal residence indebtedness exemption I would have to be living in the home at the time of the event (short sale or foreclosure). The IRS test for this is called the “Facts and Circumstances” test. If audited, in order to prove I lived in the home, I would have to produce copies of a driver’s license, voter registration, bill statements, utility statements and any other supporting evidence that indicated that I still lived at the home at the time of the short sale or foreclosure. The 2 out of the last 3 years exemption we commonly reference for principal residence is only for calculating capital gains taxes and NOT for invoking the exemption from canceled debt tax.

Those are the three exemptions for being excused from having to pay the tax on canceled debt. Unfortunately many investors cannot use the exemptions because they are not bankrupt, not insolvent and it’s not their principal residence. But all is not lost. Investors get to take the capital loss from the lost investment of an investment property. Very often the capital loss exceeds the amount of canceled debt. So, while they are not “exempt” from paying the tax, the loss of investment would offset the gain of the 1099 obviating the need to pay tax.

Generally speaking, most homeowners who short sell will often avoid paying income taxes because they either qualify for an exemption or they have capital losses to offset the “gain”. For more information on IRS policies, regulations and forms related to canceled debt from a short sale or foreclosure, I also recommend the following reviewing the following IRS links: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation and Mortgage Workouts, Now Tax-Free for Many Homeowners; Claim Relief on Newly-Revised IRS Form.

Of course, as with all tax matters, it is HIGHLY RECOMMENDED that a homeowner consult with their tax preparer or CPA to understand how these exemptions may (or may not) apply to them. We will be happy to recommend or refer a professional tax advisor if interested.

Yes, it can be a very good idea for both buyer and seller. Unlike a traditional real estate transaction where a seller assumes great risk when allowing a buyer to occupy prior to closing, it is the buyer who assumes the greater risk when occupying a short sale property prior to closing. There is no guarantee that the short sale will be approved which could cause the buyer into a second move. The seller has significantly less risk when allowing the buyer to pre-occupy during a short sale because they have effectively abandoned all future interests in the property anyway.

Here’s what a buyer should consider when contemplating pre-occupancy of a short sale. The only reason to consider moving into a short sale home early is because it is better than any other alternative available to the buyer. Either the buyer has to move from their existing residence or they need to be relocated by a date certain (for school or job purposes) or they just want to lock up the opportunity to be the preferred buyer because they love the home. If they have reason to believe that their offer is a market value offer and that the “probability” of a successful short sale is higher than normal, they might benefit from moving into the home.

The worst outcome is that the short sale fails and the home is foreclosed. If the buyer and seller enter into a market term lease making the buyer a tenant of the property, any subsequent owner at foreclosure must give the tenant in possession at least 90 days to vacate after notice (in the case of a month to month lease) or allow the tenant to live out the term of the lease. This is according to the Protecting Tenants at Foreclosure Act of 2009. With a valid lease, the buyer won’t be forced to make any sudden moves.

Once a buyer is in possession, the short sale negotiations are much easier because there is not the pressure of a deadline. Both buyer and seller should be able to wait out the process. If the buyer is concerned about the cost of a second move, the parties should consider paying the rents into an escrow account subject to the final closing. If the short sale closes, the seller would be entitled to the rent because they would have “performed” under the lease terms. If the home is foreclosed, the paid rents can be refunded to the buyer to offset the cost of relocating.

A seller would benefit from having the home occupied. They would not be responsible for utility costs and would have to worry about their lender securing the home because it’s vacant. The lease and the sales contract should be clear that the buyer/tenant accepts the property in as-is condition upon possession.