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Ask Andy: Short sales

It's a long shot.

You'll still have to leave your house.

But folks facing foreclosure have another option:  a "short sale."

A "short sale" is selling your house for less than the value of the mortgage. If you owe more on the loan than the house is worth, a short sale may be a way to avoid the mess of a foreclosure and maybe recoup a little bit of money to help you set things straight.

But there are some curve balls that come with short sales.

One is you will need to convince your lender to forgive the balance of the mortgage after the sale.  To do that, you will have to do prove your hardship. The IRS requires a 1009-R form that proves the net gain or loss.

"When a borrower is seeking a short sale option, we do require a full financial analysis to justify or show that the property is unaffordable," says Roshun Austin, community relations specialist of GMAC Mortgage, LLC, the HOPE/Keychain Alliance and the Memphis Housing Counseling Network.  "We use this in our justification to the investor. 

"We also look at the market conditions and comparable sales to determine if the offer makes sense.  Otherwise, the investor will counter."

If the lender let's you loose, you will take a hit to your credit, but not as much as if you let the loan slide into foreclosure.

One good thing, though, according to Austin and to Money magazine, you will not owe taxes on the forgiven debt as long as the house is your primary residence.

"Under the Mortgage Forgiveness Debt Relief Act of 2007, up to $2 million of the canceled debt on a principal mortgage is now tax-free," says Austin.  "The new law does not apply to investment properties."

The Memphis Housing Counseling Network has folks who can explain whether a "short sale" is a good idea for you:  http://memphis.earnbenefits.org/page.php?pageID=607 or 901-725-8361.  The network offers FREE housing assistance and numerous options to help keep at-risk borrowers from losing their homes.

Memphis Area Legal Services may also be able to advocate for low-income people seeking a loan modification.  You can reach MALS at www.malsi.org or (901) 523-8822.

You can also go to the FHA site at www.fha.gov or call HUD's housing counseling and referral line at 1-800-569-4287.

For details about the Obama administration's mortgage rescue plan, link here to my Ask Andy story:  http://www.wmctv.com/Global/story.asp?S=10076759.