We want to sell our condo because we can't live in it since we had a baby (it's a one bedroom) and we can't

Asked by Ducky4485, San Ramon, CA Mon Jul 13, 2009

get anywhere near what we're paying in mortgage for rent and we can't afford it. Should I even bother to try to get a loan modification if we have only had the mortgage for two years, it's a forty year loan, and we have a fixed rate of %5.25? I mean how much better can they make it? Should I just try to get a short sale? If I do a short sale am I liable for taxes on the balance if it is forgiven by the bank? We bought it for $330,000 and it is now worth $200,000 so that would be a big chunk to pay taxes on.

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Erica Starkey’s answer
Erica Starkey, Agent, Danville, CA
Tue Jul 14, 2009
I am so sorry to hear about your situation. Though I know it's not very comforting, you are not alone. We work with clients everyday who are in similar situations. What I can say is that you're doing the right thing by asking questions and exploring all of your options. Many people are opting to do short sales, as the process has changed for the better in recent months. It sounds like the space does not work for you anymore so finding a way to get out from it may be a good option.

We are an experienced short brokerage and we work with banks and lenders who can advise you on the impacts of a short sale. I would love the opportunity to speak with you in more detail about your options and the short sale process in general. It can be very tricky so if you do decide to go down that road, make sure it's with someone who is experienced and knows the process. Please feel free to contact me directly any time. I can also send you some helpful articles on short sales that might help answer some of your questions.

Erica Jones Starkey
Broker, Co-Founder
DRE# 01503540
JSCA Real Estate Group
Providing Superior Solutions for Your Individual Real Estate Needs
office: 925.989.1613
fax: 925.905.2417
0 votes
Kamal Randha…, Agent, El Sobrante, CA
Mon Jul 13, 2009
You mentioned earlier that your husband recently lost his job, which qualifies for a hardship in conducting a short sale so you may not have a problem with qualifying.

Kamal Randhawa
0 votes
Patrick Thies, Agent, Anytown, IL
Mon Jul 13, 2009
HI Ducky,

First, you will need to check with an attorney familiar with short sales. One of the requirements for a short sale is that you need to be in a hardship position in order to do a short sale. It needs to be something on the order of unemployment, bankruptcy, divorce or something like that. Things that do not qualify are bad purchase decisions, buying another home, pregnancy or moving into an appartment. If you can do the short sale, then you should be able to use the Mortgage Forgiveness Debt Relief Act to avoid paying taxes. Prior to October of 2007 you did have to pay taxes on the forgiven amount.
0 votes
Fred Griffin, , Tallahassee, FL
Mon Jul 13, 2009
"Am I liable for taxes on the balance if it is forgiven by the bank?"

See a Tax Attorney or CPA for an explanation of:

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation


the CPA or Tax Attorney will [probably] advise you to get a

IRS Form Cancellation of Debt from your Lender:



As Steve pointed out below, the Loan Modification Program has helped only 270,000 owners,
far short of the Four Million that Obama promised:


Best wishes to you,
0 votes
Dave Sutton, Agent, Portland, OR
Mon Jul 13, 2009
A loan modification may very well be your best answer, but don't try to do it for yourself. If you want a referral to someone with experience (who will not charge you unless he actually gets the modification), let me know
0 votes
Steven Ornel…, Agent, Fremont, CA
Mon Jul 13, 2009
Hi Ducky,

I am very sorry to hear of your situation. I'M NOT A LAWYER OR TAX professional, nor am I aware of ALL the details of your circumstances; however, here's my opinion:

Your current LTV appears to remove a loan mod as an alternative. The success level of the Loan Modification program has been pretty poor in my opinion, only allowing 105% LTV (note that the Federal government is coming out with 125% LTV Fannie & Freddie loans for this program). As of the end of June 09, HUD states that “Since the administration announced Making Home Affordable Feb. 18, more than 200,000 borrowers have received offers for trial loan modifications, tens of thousands of refinances and trial modifications have gotten under way and more than one million potentially eligible borrowers have been sent informational mailings.” Considering the depth of the problem, this does not give one a “warm and fuzzy” feeling does it?

If you want to view Loan Mod guidelines see:

If you really absolutely can’t afford to stay in your home a Short Sale would be better for you from a credit perspective. Credit bureaus put short sales in a different scoring bucket than foreclosures when generating a score. The foreclosure bucket is dealt with more severely in that it takes longer to recoup the points lost by the event.

Besides the scoring by the credit bureaus, lenders (read Fannie & Freddie) allow a return to the best rate pricing sooner with a short sale (2 years) than with a foreclosure (3 years for FHA & 5 years for non-FHA). For a Short Sale the Credit score hit ranges 80-200 points from best case to worst case with short sales. Figure it’s closer to 200 points with a foreclosure.

While its true that your credit report will take a hit, your score will be negatively affected for 2 years after the foreclosure and it will show in the "derogatory" section of the credit report 7 to 10 years. Subject to change, lenders will also not lend to anyone who has had a foreclosure/short sale within 3 years.

Finally, the forgiveness of debt (cancellation of debt) is treated as ordinary income by the IRS despite the fact that the borrower has received no cash at the time of a short sale or foreclosure. However, if the cancelled debt amount is considered "qualified principal residence indebtedness" pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, which lasts until 2012, there will be no taxation on this forgiveness of debt.

In any case, no matter what anyone posts on this subject, your situation should absolutely be reviewed by a RE Lawyer AND Tax professional.

Best, Steve
0 votes
blaison samu…, Agent, Santa Clara, CA
Mon Jul 13, 2009
if you cannot afford it and wants to sell it then short sale is the option you can think of. If it's your primary residence then you dont have to pay taxes if you do short sale, according to the Mortgage Relief Act. Short sale will affect your credit but not as foreclosure. You need a trained and xperienced short sale realtor if you are planning on short sale. Consult with your CPA also any tax related questions.

Let me know if I can help you with anything.

Blaison Samuel
Certified Short Sale Specialist
0 votes
Johnny Huang,…, Agent, Walnut Creek, CA
Mon Jul 13, 2009
When considering a short sale, consult with a lawyer to see if the bank will forgive or go after you for the remaining amount. Also, check with a tax advisor on what kind of tax liability you would have on the difference.

If the bank is willing to modify the loan, make sure it's a comfortable amount for you on a monthly basis. Sometimes the modification won't work for the borrowers.

Unfortunately, without knowing the terms of the loan contract (and only a lawyer can interpret that document), agents can only refer you to the right professionals.

IMO, your note is somewhat low and long (40 year vs 30 year). If you can't afford the mortgage, then talking to a lawyer would be the first thing to do. Shannon Jones in Danville is a great one to call. Just google her.
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