HELP! THE EQUITY IN MY HOUSE IS GONE!

Feb 21, 2008 - 10:04 AM PST

The real estate market has taken a toll on neighborhoods around the U.S. So what do you do if your one of the homeowners needs to sell and you owe more than the house is worth? First, you may want to look into renting the house out until the market turns around and the equity comes back. Keep in mind that may be a long time, so objectively see what you could rent the property for and include all expenses like maintenance, vacancies, etc. If you’re still bleeding money you may want to sell.

When you need to sell and you have no equity in your house that’s when you need to do a short pay or what most people call a short sale. This is when the lender takes less then what is loaned on the home. Here is what you need to know upfront. You can’t make or accept money for the sale of your home if the bank takes a loss. Assuming the bank agrees to a short sale, they will pay for all the transaction fees involved plus a reduction of the payoff amount. In return they will send a 1099 to the IRS. This means whatever money they lose on the house they will send a notice to the IRS that you made that money so you may have to pay taxes on that. You’ll need to talk to a knowledgeable CPA about this before you accept an offer. Depending on the current tax laws and your situation the tax liability might be minimal. If your loan is the original loan you bought your house with, otherwise known as a purchase money loan, then you have a non-recourse loan under California law. If you have refinanced, then the lender has the legal right to sue for the money lost on the home. Don’t panic, most lenders don’t do it. I would advise you to talk to an attorney, due to various laws in different states and countries. Also keep in mind in order to do a short sale the bank will request your financial information. If you lied about how much you made to get the loan for you house then you’re probably better off letting the home go into foreclosure. If they know you lied then they can open an investigation for fraud. Here is a list of items the bank may require before they consider a short sale:

Hardship Letter
Completed Financial Statement
Documents proving hardship
IRS tax returns for the last 2 years
Pay stubs for the last 2 months
Bank statements for the last 4 months
Listing agreement
Purchase offer
Preliminary title report
HUD-1 settlement statement or preliminary statement
Marketing history
Written notice from all junior lien holders
Doing a short sale can take months and even then they may decide not to do the short sale after doing the work and waiting a lot of time for an answer. Although there are no guarantees the bank will cooperate you will want to work with a realtor that’s knowledgeable regarding the short sale process and has good negotiating skills. They will need them when dealing with the lender.


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