My divorce is resulting in me owning our home which is currently underwater and needs 25-30k worth of repairs to make it sellable. (Don’t ask how I got here) I’m curious what the consequences of my selling it as is and taking the up to 50k loss on the property is. Would I need to come up with that cash at the close of the sale or would the bank allow me to finance the shortage?
Short sale.
What is that? What impact does it have on my finances? Will I need to come up with cash?
Short Sale****
Selling a home for market value and having the lender take less than is owed is called a “Short Pay” or “Short Sale”. Our office has handled hundreds of short sales over the past 20 years. Although each lender handles them a little different the process is very similar with all lenders. In a short sale the borrower markets the property and obtains an offer at current market value. The lender agrees to take the net proceeds after deducting the normal costs of sale, including real estate commissions, even if it is less than is owed on the property.
Click here for a 7 minute audio (MP3) describing the short sale process
Typical Rules to Qualify for a Short Sale
The borrower must be at least 30 days late making their scheduled payments.The borrower must demonstrate a hardship. Hardships include, divorce, change of job, change of income, change of family size, job transfer, recent medical bills.The property must be sold for current market value. The lender will get an appraisal and have local Brokers provide a price opinion.The property can’t be sold to an immediate family member or controlled business interest. It must be an “arms length” transaction.The borrower must maintain the property until the close of escrow.
A short sale can have tax implications. The lender may give you a 1099 for the difference between what was owed and what the lender received. For example, if you owe $210,000 and the net proceeds from the sale are $170,000 you may have to report $30,000 in income on your state and federal tax returns. IRS tax code says that if the borrower is insolvent at the time of sale that they do not have to report the income. In the hundreds of short sales our office has been involved with the lender has never sent a 1099. The Mortgage and Debt Relief Act of 2007, signed in December of 2007, generally allows the short sale of your principal residence without tax consequences as long as the total value is under $2 million dollars.
Thanks. Might make sense for me to take the cash hit and put the improvements in that might get it closer to what I owe.
Jen, you and your ex (or soon-to-be-ex) sound like you are in a very similar situation as I am with my ex. She now owns the house and it’s (in her case) just a bit under water. Financially it would have been better for her (and worse for me) if she had said she wanted to sell the house as part of the divorce as in that case any costs / losses would have been shared between us. She didn’t start to think about selling until after the divorce was final. My understanding of short sales is that it can require some degree of agreement / cooperation from the lender, which they may or may not be willing to give. It will also negatively affect the credit of the persons on the mortgage note, regardless of who was assigned the debt in the divorce paperwork. According to both the lender for the house she now owns and my divorce attorney, if the house sells for less than what is owned then
- cash would have to be brought to closing in order for the sale to go through
- the owner of the house is responsible for the costs of selling the house
feel free to PM me if you have any other questions.
Chris.
For example, if you owe $210,000 and the net proceeds from the sale are $170,000 you may have to report $30,000 in income on your state and federal tax returns.
What happened to the remaining $10,000?
For the OP: some banks are paying people to do a short sale, rather than proceed through the lengthy and expensive foreclosure process. It’s in their interest to get the house now, in reasonable condition, than risk it being trashed while the foreclosure goes forward. I don’t know if you fall into that category of contemplating foreclosure, though.
Not contemplating foreclosure just trying to decide the benefits of putting 25k into the house in the hopes it will bring it up in value enough to make it sellable at a smaller loss or just selling as is, taking a larger loss, and not bothering with the fix-up.
My wife and I live in Boston, but have her condo in Norwalk CT that is worth more than we can get for it.
Do you talk to the lender before putting it on the market? We’re unfortunately going to be in the short sale position and I am not sure what the best way to go about the process is.
What’s you market like there? Increasing/Declining? Supply of homes for sale?
Can you rent it and wait for things to recover?
Declining. I can’t rent in its current condition. There isn’t a threat of foreclosure, unless I lose my job, but I can’t afford the repairs necessary to bring it close to the value of the loan. I can do some of the work myself but not everything. I couldn’t afford to move out while it is on the market because I can’t afford rent and the mortgage. I’d hoped to get out of there within the next 6-8 months but it sounds like I’m going to be stuck there for a lot longer while I chip away at the repairs.
Don’t ask how it got in the condition its in, I’ll blow a cork.
Jen,
You can also request what’s called a ‘Deed in Lieu’ from your mortgage holder. Similar to a short sale, not a foreclosure, but kind of in-between. It’s where you discuss with your bank them simply taking the mortgage back and release you from any future financial claims. Some banks are choosing this instead of the cost of going thru a foreclosure or the hassle of approving a short sale. With your current circumstances, you might find this a more appealing option and the bank might be more willing to work this out with you.
Would be hard to justify spending 25K on a home and not clear the value. Funds might be best served to help you get back on your feet with an impending move.
Best of luck…
Jamma.
Just to add my 2 cents here coming from someone who is divorced and living with the ex in an underwater house. This is just one of the reasons we decided to stay together. It’s a nightmare to even contemplate the hoops we’d have to jump through to sell the house. It’s easier just to get along 
Good luck.
Shit, from the stories I have read some people are into year 2/3 of paying NO mortgage and still living in their home.
I guess everyone’s doing it these days.
I have no intentions of foreclosing. I can afford the monthly mortage, on a shoestring budget, but will be locked into the property for years when I want to get out next summer.
You can always leave that as an extreme option in case something unforseen happens.
How does you monthly stroke compare with the cost of renting?
I could rent a nice 1 br for about half.
What sort of improvements need to be made to make your house rentable?