Sample Hardship Letter: If you find yourself in a difficult real estate situation where your home and loan is upside-down, don’t fret, a short sale might just be the answer to help cure your mortgage woes. In today’s market, it is imperative that you take a step back from all of the noise to reflect upon your situation. At each point in your financial history, you made decisions that you believed would best help you realize your goals. Because nobody has perfect foresight into their future income status, or the property market generally, it is only natural to re-evaluate your current debt situation when things change unexpectedly. One option for home owners is short sale negotiations, which may allow you to sell your home to satisfy the existing loan.

First and foremost, it’s important that you act as your own primary advocate in this situation. Put your best foot forward because short sales only work when fully agreed to by both the borrower and the lender (your mortgage holder). Understand that, given today’s extraordinary market environment, even high profile individuals are often in a position where there is a gap between what they can afford and what they believed they could afford in the future. Take the case of well-known TV personality Ed McMahon: his Beverly Hills home faced foreclosure due to unexpected changes in property value, interest rates and his own personal income (see Business Week).

In order to satisfy the requirements of the home loan, Mr. McMahon has been working to reach an agreement with a third party to clear a short sale to satisfy his mortgage. Like Mr. McMahon, you may find it initially difficult to find a market clearing transaction to satisfy your lender, but remember: just as hard work and persistence allowed you to afford a home in the first place, diligence can help you overcome obstacles to find the best way to address to your current home loan.Sample Hardship Letter

A short sale MUST be accepted by your current lender or servicer in order to proceed with the sale of your home. Short sales are considered a privilege and not a right. So, with that said, you must be prepared to provide proof and evidence that you qualify and deserve a short sale by your lender. Getting a lender to approve a short sale is primarily a question of economics. You have to provide hard numbers to show that the amount of money a bank will realize on the short sale is better than the amount it may recoup from foreclosing on the property and selling the property.Sample Hardship Letter

Sample hardship letter: Your short sale submission package should include:
1. Hardship Letter – explaining the circumstances that make it impossible for them to pay the full amount of the loan. The seller needs to be able to show true financial hardship. Someone with the assets or the income to pay is unlikely to be considered.
2. Proof of employment or unemployment – W-2 forms from employers (or a letter explaining the seller is unemployed).
3. Proof of income – bank statements, two years of tax returns, and other financial documents outlining income and debt obligations. Most lenders will ask if you have an access to a retirement fund, investment fund, 401’s, stocks, and how much is accessible and why if these funds are not accessible has to be provided in a written statement.
4. Comparative Market Analysis or CMA, Broker Price Opinion or BPO (Mini appraisal). The bank will need comparable sales data or a broker’s price opinion showing the current estimated of value of your home. Be very thorough with your analysis with Closed and then Active listings. Closed comparable sales are of course what they are looking for above all, but if you cannot find any homes sold in the last three months in the exact same complex or street or block due to thesluggish market, be very detailed with your analysis and calculate by square footage, age, size, views, frontage and upgrades, amenities etc..
5. Listing Agreement or Proof of Listing and The Listing Agreement in a Short Sale: Any offer is contingent primarily upon the Lender’s approval and secondarily on the buyer’s acceptance. The Listing has to be executed and advertised on the Multiple Listing Service (MLS) prior to sending your package for short sale consideration to the Loss Mitigation Specialist.
Tip: In preparing the package, be careful about discrepancies between the seller’s income and the income used to obtain the loan. A big gap may indicate mortgage fraud, unless employment circumstances have drastically changed.

Other Items you want to include in your short sale package:
• Cover Letter
• Authorization to Release Information
• Two Months Bank Statements
• Supporting Hardship Info – HOA liens, medical/disability statements etc.
• Repair Estimate for the Property
• Contract
• Net Sheet
• First mortgage holder may ask for a payoff amount from the 2nd
• Second mortgage holder may ask for a payoff amount from the 1st
• Lender may ask for an Initial Title Report

Ultimately, a short sale can be understood as a negotiation to recognize a changed environment from when the loan was originally signed. Any offer to buy the property must be evaluated by the lender, who is in a favorable position of being able to determine whether to accept such an agreement. Because of this, it’s crucially important that you present your property in the best possible light, just as you would in selling your home directly. Never accept the least common denominator as the only solution to the issue. By working hard as an advocate for your own cause, you can make a solid case to the lender that a short sale might be in both parties’ best interest.Sample hardship letter

Sample hardship letter: Negotiating Deficiency is Key When Attempting a Short Sale:

With a short sale, the lender has three possible ways to handle the deficiency balance, which is the portion of the mortgage debt not covered by the sale of the home. First, the lender can attempt to collect the deficiency balance from the seller after the property has closed. Second, the lender may require the seller to sign an unsecured promissory note for the deficiency balance as a condition of agreeing to the short sale. If the new note is for less than the balance of the original debt, the difference would be considered canceled or forgiven debt. Third, the lender may agree to cancel the entire deficiency balance. You must negotiate for the release of both the property lien and the underlying personal debt secured by the note. If you fail to do this, the lender may not forgive the personal debt and it will become a collection.

In short sales, just as in any negotiation, it’s important to put yourself in the lender’s position and try to understand their approach. The decision they make is based upon the opportunity cost of holding onto the property after foreclosure and then determining what to do with the asset. If they believe that the stated property value is low then it will make it more difficult to clear a short sale. Because of this, it’s important to present the property as a potential investment to other buyers, putting your value proposition at the center to generate the highest possible offer. The higher the offer, the more likely your bank will be open to accepting a short sale. It is wise to consult with an Attorney or Real Estate Agent who is familiar with short sale negotiation and has significant experience working with lenders. Keep in mind that Attorney’s fees or Realtor fees come out of the lender’s net proceeds; therefore, you should not have to pay out of your own pocket for an Attorney or Realtor to assist you with the transaction.Sample hardship letter

Sample hardship letter: The IRS on Shorts Sales, Foreclosures and Debt Forgiveness

From the IRS on Shorts Sales, Foreclosures and Debt Forgiveness: The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for this relief.
This provision applies to debt forgiven in 2007, 2008 or 2009. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
The amount excluded reduces the taxpayer’s cost basis in the home. More information on claiming this exclusion will be available soon.
The questions and answers, below, are based on the law prior to the passage of the Mortgage Forgiveness Debt Relief Act of 2007.

1. What is Cancellation of Debt?
Sample hardship letter: If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simple example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

2. Is Cancellation of Debt Income Always Taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, this may result in other tax consequences, as discussed in Question 3 below.
3. I Lost My Home to Foreclosure. Are There Tax Consequences?
There are two possible consequences you must consider:
Taxable cancellation of debt income (Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans).
A reportable gain can occur from the disposition of the home because foreclosures are treated like sales for tax purposes. Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.
Use the following steps to compute the income to be reported from a foreclosure:
Step 1 – Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt).
1. Enter the total amount of the debt immediately prior to the foreclosure___________.
2. Enter the fair market value of the property from Form 1099-C, box 7___________.
3. Subtract line 2 from line 1.If less than zero, enter zero___________.

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.
Step 2 – Figuring Gain from Foreclosure
4. Enter the fair market value of the property foreclosed on. For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________.
5. Enter your adjusted basis in the property (Usually your purchase price plus the cost of any major improvements) ____________.
6. Subtract line 5 from line 4. If less than zero, enter zero.
The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.
4. I Lost Money on the Foreclosure of My Home. Can I Claim a Loss on My Tax Return?
No. Losses from the sale or foreclosure of personal property are not deductible.
5. Can You Provide Examples?
A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000.

The borrower figures income from the foreclosure as follows:
Use the following steps to compute the income to be reported from a foreclosure:
Step 1 – Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt).
1. Enter the total amount of the debt immediately prior to the foreclosure___$220,000__.
2. Enter the fair market value of the property from Form 1099-C, box 7 ___$200,000__.
3. Subtract line 2 from line 1.If less than zero, enter zero___$20,000__.

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.
Step 2 – Figuring Gain from Foreclosure
4. Enter the fair market value of the property foreclosed. For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure __$200,000__.
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements) ___$170,000__.
6. Subtract line 5 from line 4.If less than zero, enter zero___$30,000__.
The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.
In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower’s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt.
Other examples can be found in IRS Publication 544, Sales and Other Dispositions of Assets, under the section “Foreclosures and Repossessions.”
6. I Don’t Agree With the Information on the Form 1099-C. What Should I Do?
Contact the lender. The lender should issue a corrected form if the information is determined to be incorrect. Retain all records related to the purchase of your home and all related debt.
7. I Received a Notice from the IRS on This. What Should I Do?
The IRS urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.

Sample hardship letter

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