Are You a Homeowner Facing Foreclosure? We can help!
Today, Headlines are filled with stories about homeowners in the situation of financial distress—people who face a lender’s foreclosure on their home.
Millions of American home owners are stumped on what to do.
Like most disasters, this one has produced its share of rumors and misinformation. One of the biggest ones is “just let it happen.” Why fight back, this line of thinking goes. It’s too emotionally draining, and the government’s loan modifications aren’t helping many people. Well, that’s only partly true.
While government loan modification programs fall short of the mark so far, there is another solid, sensible option for homeowners. It’s called a short sale—a sale to a buyer where the seller’s lender settles to accept less than the full amount owed.
Why not be foreclosed? Why sell short? Agents who have closed hundreds of these transactions provide a checklist of reasons:
• Avoid the foreclosure stigma – Homeowners will always have to disclose that they had a foreclosure on any mortgage application and (many job applications) that they submit in the future. This can have an adverse affect on their future mortgage rates. Foreclosure is asked about specifically in credit inquiries. There is no seven-year time limit on this item.
• Protect credit score – Credit scores will be lowered by 300-plus points (per loan) by foreclosure. The impact of a short sale—about half that much.
• Improve eligibility for a government insured loan – The homeowner will be ineligible for a government insured loan for 5-7 years (only two years in a short sale). A foreclosure is the one credit report item that is almost impossible to have repaired.
• Avoid a deficiency judgment – Lenders can seek a deficiency judgment against the homeowner and collect any amount they do not recover at sale.
• Protect employment prospects – Many employers run credit checks on prospective employees. Foreclosure is one of the top items that will put a potential new hire, or even current employment, in jeopardy.
These are the top reasons, but there are more. An expert short sale specialist agent can give a full picture of the options.
What Is A Short Sale?
A short sale is the sale of a property for less than what the owner still owes on the mortgage. A short sale is an alternative to foreclosure when a homeowner needs to sell and can no longer afford to make their mortgage payments. The lender agrees to accept less than the amount owed to pay off a loan now rather than taking the property back by foreclosure and trying to sell it later. Lenders agree to a short sale because they believe it will net them more money than going forward with a lengthy and costly foreclosure process.
Can Any Real Estate Agent Effectively Handle My Short Sale?
No. A short sale is a very complicated real estate transaction and one that has very important implications for you. More than any other type of residential real estate transaction, a short sale should be handled only by a real estate broker who has substantial experience with the short sale process , and a strong track-record of success in negotiating short sales for their clients. You wouldn’t have your family doctor perform heart surgery. And, you shouldn’t expect any real estate broker to be qualified to handle this highly complex real estate transaction for you.
Why Should I Choose A Short Sale Over Foreclosure?
Whether you should do a short sale or let your property go to foreclosure depends on several factors. In most instances, a short sale makes more sense than foreclosure. In general, when you want to obtain a loan to purchase a property in the future, more opportunities will be available to you if you do a short sale. And, contrary to popular belief, you can be current on your payments and still do a short sale. In fact, if you are current on your mortgage through a short sale, you can qualify for an FHA loan afterwards without any waiting periods. The same option will not be available following a foreclosure.
While doing a short sale will negatively affect your credit, there are many benefits to choosing a short sale over foreclosure. With a short sale, you are in control of the sale, not the bank. You may sleep better at night knowing who is buying your home, and you can spare yourself the social stigma of foreclosure.
Every homeowner’s situation is different, so we always recommend that you speak with a real estate attorney that can advise you on the legal and tax implications for your circumstances.
How Do I Know If I Qualify For A Short Sale?
If you owe more than your house is worth and can’t afford your mortgage payments, you may qualify for a short sale. Every situation is unique, but in general the basic criteria for qualifying for a short sale are:
- You need to sell your home.
- You owe more on your mortgage than your home is worth.
- You have a personal financial hardship that will prevent you from making future payments. (Examples of hardship include loss of job, divorce, death of a spouse and medical emergency or illness.)
When calculating if your house is worth less than the amount owed on the loan, you should deduct out what you would pay in real estate commissions, closing costs, and state excise taxes to sell your home.
Will I Get Any Money From The Sale?
Unless specifically authorized through a federally-sanctioned program such as HAFA, when a lender approves a short sale, they typically require that the borrower (seller) not receive any money from the sale of the property since the lender is going to take a loss on the loan.
How Long Does A Short Sale Take?
The short sale process is complicated and time-consuming. It can take several weeks, or even months, to get a short sale approved. Many lenders have several layers of management, insurers, and investors that will have to be satisfied before a short sale is approved. As a homeowner, it is important to be patient during this long process. It is also critical that you work with a short sale negotiator who is familiar with the various requirements of individual lenders to ensure that the process moves as quickly as possible.
Is There Enough Time To Do A Short Sale Before A Foreclosure?
Maybe, maybe not. Just starting a short sale will not automatically stop a foreclosure. However, many times a lender can be convinced to postpone the foreclosure to let a short sale negotiation take place. So, while there are no guarantees, it does not hurt to try.
Does A Short Sale Always Work?
No, there is no guarantee that this will work. Once you fall behind on your loan, the lender can proceed to foreclosure if they choose to. But typically, lenders prefer not to foreclose and, if effectively presented with smart alternatives, they will often agree to a short sale rather than foreclose. If a short sale is attempted but doesn’t work, your house will likely go to foreclosure.
I Have More Than One Mortgage On My House. Can I Still Do A Short Sale?
Yes. Each mortgage can be negotiated individually. However, multiple mortgages make a short sale more complicated and time-consuming. Not only do you need the cooperation of the first lender, the second mortgage holder needs to agree to a short sale as well.
What Is A Release?
A lender may offer to “release” its security interest against the property in exchange for less than the total amount of the note. A release will allow the property to be sold without paying off the obligations of the note. However, the note is not satisfied. The advantage of a release is it allows the property to be sold and helps you avoid a foreclosure. The disadvantage is the remaining debt on the property (sometimes called a deficiency) still exists. You are still liable for the note. In other words, you still owe the money. In reality, it’s not likely that the lender will pursue the deficiency unless you have other significant assets. Furthermore, if you don’t attempt a short sale and the property goes to foreclosure, you can be liable for the full amount of remaining debt on any additional mortgages beyond your first mortgage.
What Is A Satisfaction?
A lender may agree to accept less than it is owed as complete and total satisfaction of the debt and release its lien against the property. Your note and obligation to the lender are satisfied for less than you owe. When the property is sold, the debt is paid off completely. Sometimes short sale negotiations are successful in obtaining complete satisfaction. Sometimes all that can be obtained is a release.
Are There Tax Consequences?
When a lender cancels, or forgives, your debt, the tax laws may consider the forgiven debt as taxable income. If a lender agrees to a satisfaction, the Mortgage Forgiveness Debt Relief Act of 2007 provides that debt forgiveness of up to $2 million is not considered taxable income if:
- The house has been used as your principal place of residence for at least two of the previous five years.
- The debt has been used to buy, build, or make substantial improvements to the home.
Home equity loans where the money was not used to buy, build, or improve the home do not qualify for the exclusion. Neither do mortgages for second homes or rental properties. The law has been extended to include debt forgiven through 2013.
There are additional tax considerations to keep in mind. A debt cancellation will affect your property’s cost basis. Insolvency or bankruptcy may also alleviate some of the tax burdens of a debt cancellation resulting from a short sale. You should always confirm tax matters with your tax professional.
Can I Keep The House Through A Short Sale?
The purpose of a short sale is to get the property sold, so you do not keep the house. Just as in a normal sale, you will be moving, typically when the sale closes. Some sellers choose to move before the house closes. You will not be allowed to remain in the house. If your intention is to remain in your house, you should consider other options besides a short sale.