Short Sale Financial Statement

What is best for us to do?

We purchased home with $172,000. down.  We made many improvements to home.  We refied for 10 year interest only. 

Our son was living with us and was paying $1,000. a month.  My husband got injured at work and no longer can work over-time (which helped with the payment). We lost $1,000. a month in overtime and our son’s $1,000.

We cannot keep up the house as both my husband and I have major back injuries. 

My husband is getting a settlement for his injuries, but we would like to use this money to purchase a one story small house as we only have 2 children living with us now (we had 5 children living with us).

Should we do a short sale and hope for the best?  Could we or should we purchase another home? 

We have put our lives (thank goodness not our souls) into this house.  But, we feel like the boy who tried to keep the dike from cracking.  Help!!!!!

And thank you in advance for any advice. 

Suzanna

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Hi Suzanna,

It sounds like you may meet the insolvency exclusion for debt forgiveness.  The Mortgage Forgiveness Debt Relief Act of 2007 excludes phantom cancellation of debt income for qualified principal residences with regards to acquisition indebtedness or money that was otherwise used to improve the property.  First, talk to an accountant to make sure you will be covered by one of the preceding and not have a tax bill as a result of a short sale.

Here is Freddie Mac form 1126.  This is a standard form that is accepted by most lenders along with the hardship letter you’ve detailed above.  You’ll notice that Freddie Mac form 1126 does not ask if you will receive a settlement for disability down the road. 

Should you do a short sale and hope for the best?  That’s entirely up to you.  You may find that the lender is willing to modify your loan to a lower payment amount.  That might be the first option and it may make it possible for you to keep your home.  If not, then consider the paragraphs above, as a short sale with a full release of liability may be a viable solution.

Thanks for the questions and hope this helps.

Paul

This author is not an attorney or accountant and this information should not be considered legal or tax advice.  Please consult an attorney for legal or tax advice.

(source=freddiemac.com/sell/forms/pdf/1126.pdf)