The federal government has been very clear that they support short sales by homeowners. The best example of that is from the Fannie Mae Announcement 08-16, released on June 25, 2008. In this announcement, Fannie Mae updated their guidelines for lending to borrowers with a history of foreclosure.

Specifically, they made a new category called preforeclosure sales (Short Sales). Fannie Mae stated that borrowers who complete a Short Sale are eligible for another Fannie Mae loan after just two years. For a borrower with a foreclosure, they upped the amount of time from four to five years. This is very significant.

Fannie Mae and Freddie Mac buy up over 80% of all loans originated in the United States. Most of the other 20% of the lenders use Fannie Mae guidelines in their own lending. If a homeowner wants to become a borrower anytime soon in the future, they need to get a short sale done prior to the foreclosure date.

The IRS can tax the amount of loans to the Lender as a gain for the Homeowner. Thankfully, Section 121 of the IRS code excludes up to $500,000 in gain for a married couple if they have homesteaded the property for 2 of the past 5 years.  In addition if the homeowner is legally insolvent (owe more debt than their assets are worth) when their house is sold, they may also be exempt from tax. The easiest method to reduce the tax liability for homesteaded property is through the “Mortgage Debt Forgiveness Act” (H.R. 3648). This law was signed on December 20th, 2007 and allows for homeowners of homesteaded property that have had Short Sales approved and closed to not have any tax liability.  Check with your accountant or CPA to confirm your tax strategy.

The average start to finish timeline is about 2 to 3months. It only rarely happens quicker, and quite often takes longer, depending on the lenders involved, and if there are no other liens.