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By Greater Boston Short Sales | Real Estate Pro in Massachusetts
  • Mortgage Debt Relief Act Extended Through 2013

    Posted Under: General Area, Home Buying, Home Selling  |  January 15, 2013 8:57 AM  |  189 views  |  No comments

    American Taxpayer Relief Act of 2012

    The American Taxpayer Relief Bill extends The Mortgage Debt Relief Act through 2013.

    On January 1st, 2013 the U.S. Senate overwhelmingly passed legislation to avoid the so-called "Fiscal Cliff" by a vote of 89-8. The bill, referred to as the American Taxpayer Relief Act of 2012, avoided draconian sunset tax provisions that were scheduled to take effect after 2012 under the Bush-era tax cuts. The U.S House of representatives quickly approved the bill by a vote of 257-167. The Taxpayer Relief Act was immediately criticized as falling short of the great tax bargain envisioned during the November elections. While political pundits mostly panned the legislation for being mostly a stop-gap measure, the legislation is absolutely necessary for the recovery of the U.S. housing industry. Specifically, the Taxpayer Relief Act includes an "extender" to the Mortgage Debt Relief Act of 2007, a provision that allows struggling homeowners to avoid paying taxes on the cancelation of indebtedness income  following a foreclosure, short sale or loan modification of their primary residence.

    Extension of The Mortgage Debt Relief Act

    The Mortgage Debt Relief Act of 2007 enables homeowners to exclude any canceled debt from being taxed as income as long as the indebtedness was incurred on your “qualified principal residence.” Had the extension not been granted, millions of distressed homeowners would have had less incentive to pursue a loan workout or short sale because the forgiven debt would have been taxed as income. Admittedly, the extension of the Debt Relief Act is not the panacea to the sluggish home prices and poor quality of inventory, but the tax relief will undoubtedly aid the housing recovery in 2013 because it will allow homeowners who struggle to keep up with their mortgage payments, after having already experienced declining home values, to avoid further financial penalties following a foreclosure, short sale or loan modification.

    Cancelation of Debt as Taxable Income

    In general, when a creditor cancels debt, such as unpaid balances on student loans or credit cards, the forgiven amounts are treated as ordinary, taxable income under the Internal Revenue Code. Following a short sale, the Debt Relief Act exemption is triggered when a lender agrees to forgive the homeowner from paying back the remainder of their loan in consideration of a short payoff of their primary residence indebtedness. This amount, known as the loan deficiency, would otherwise be taxed as ordinary income. The entire short sale sale industry, and the current housing sector for that matter, is largely dependent upon the tax exemption afforded by the Mortgage Debt Relief Act because the IRS does not treat the canceled debt as income. As a result, Congress' last minute agreement to avoid the fiscal cliff will directly aid the housing recovery in 2013 because homeowners will still be able to modify their mortgage and short sell their primary residence without incurring additional tax liability.

    Qualified Principal Residence Exception

    It is important to point out, however, that the Mortgage Debt Relief Act does not provide tax relief if you short sell an investment property or a home that is no longer your qualified principal residence. Qualified principal residence indebtedness is limited to forgiven or canceled debt for loans under $2 million used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. Thus, even debt incurred as a result of a refinance loan will qualify for this exclusion, but only to the extent that the principal balance of the old mortgage would have qualified. In other words, if the debt forgiven was a result of a short sale of your qualified principle residence, and you never refinanced, you will qualify for the tax relief. If, however, you took out a refinance loan on your principal residence, you will qualify for tax relief only up to the principal amount of the original mortgage.  This is a very important consideration and one that is often overlooked by many so-called short sale experts.

    Not all States Recognize the Debt Relief Act

    As previously stated, the most common tax exemption following a short sale is the qualified principal residence exception of the Mortgage Debt Relief Act. Some recourse states, however, such as Massachusetts, do not recognize the Mortgage Debt Relief Act. Homeowners, therefore, need to seek out other recognized tax exemptions, such as proving insolvency or filing for bankruptcy, in order to avoid being taxed on the debt forgiveness following a short sale. On the other hand, some short sale experts and tax professionals contend that short sales never result in tax liability, regardless of where you live or whether it is your primary residence, so long as your taxes are prepared properly. As a short sale facilitator, I don't even attempt to speculate on the tax consequences of a specific short sale transaction. I always make certain that the seller is represented by an experienced attorney as well as encourage them to seek the advice of a licensed tax professional. In general, I always assume that a short sale will result in tax liability unless the homeowner qualifies for one of the recognized tax exemptions. Regardless, even if you think you qualify for a tax exemption, all homeowners should consult with a licensed attorney and a tax professional prior to agreeing to a short sale.

    The Debt Relief Act and Short Sales in 2013

    Even though many sellers don't qualify for the tax relief, the extension of the Mortgage Debt Relief Act is absolutely necessary for the housing industry to recover in 2013. By extending the Debt Relief Act, the government is sending a message to lenders, distressed homeowners, and real estate professionals that short sales are the preferred method to assist homeowners in getting rid of a mortgage they can no longer afford. The tax exemption, along with lender incentives, encourage homeowners to be proactive about avoiding foreclosure. Fewer foreclosures will help stabilize home prices and less homeowners in default will mean a decrease in the shadow inventory.  Admittedly, not all professionals agree as to whether a short sale results in tax liability, and the waters can become rather murky the more you navigate through state-specific laws, recourse jurisdictions and the sale of investment properties or non-purchase money mortgages. If nothing else, however, the extension of the Debt Relief Act will enable homeowners to sell their primary residence at a loss without incurring thousands of dollars in tax liability while at the same time allow lenders to get rid of their non-performing loans.

    Related Posts:

    The Mortgage Forgiveness Debt Relief Act of 2007

    Short Sale Tax Consequences: Understanding Qualified Principal Residence Indebtedness

    How Does A Short Sale Affect Your Credit Score

    About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

    If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376.

    TAX DISCLAIMER: None of the information on the site shall be construed or interpreted as tax advice and is strictly for informational purposes.  Readers shall not act upon this information without first seeking advice from an independent tax professional. To ensure compliance with IRS Circular 230, any U.S. federal tax information provided on this site is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein. All readers are encouraged to seek the advice of an independent tax professional when considering a short sale.

  • Massachusetts Short Sales: Five Tips For Buyer's Agents To Ensure Short Sale Approval

    Posted Under: Home Buying in Massachusetts, Home Selling in Massachusetts, Foreclosure in Massachusetts  |  December 3, 2011 9:33 AM  |  298 views  |  No comments

    Five Buyer's Agent Tips To Ensure Short Sale ApprovalGetting a short sale approved is no easy task. Buyers can, and do, walk away if they feel the transaction is taking too long. Mortgage insurance companies frequently demand unreasonably high contributions from the seller, thus killing the deal. Servicing rights can be transferred to a new lender mid- transaction. The foreclosure auction occurs despite the lender repeatedly telling you that it was postponed. These are only a few examples of what can go wrong. Admittedly, many of the aforementioned reasons are unforeseen and cannot be prevented. The majority of short sales that fail, however, do so because the person handling the transaction makes a mistake and the buyer walks away prior to obtaining short sale approval.While it is imperative that the person handling the short sale negotiation takes certain steps to ensure a successful short sale, the buyer's agent plays an equally important role in the approval process. With a traditional sale, the buyer and seller negotiate against each other, whereas the agents in a short sale must work together to keep the transaction from falling apart. As someone with an extremely high short sale success rate,  I encourage buyer's agents to take the following steps in order to ensure a successful short sale transaction.

    1. Ask The Listing Agent Important Questions

     The buyer's agent should always inquire as to specific transaction details prior to submitting an offer. You should always begin by asking the listing agent if they will personally be handling the short sale negotiation with the lender. If they use a third-party negotiator, then you will need to speak with that individual in order to determine their experience level. The first thing you need to ascertain from the individual handling the negotiations is the amount of liens encumbering the property. If the homeowner has two loans, then you will need to obtain short sale approval from both lien holders. As you can imagine, this fact, as well as the lenders' identity, will largely dictate how long the short sale transaction should take. Keep in mind, you should also confirm that all taxes are current and, if it is a condominium, whether all condo fees are paid because any delinquencies will result in additional liens that must be released prior to a deed transfer. Once you determine the total amount of liens, you should also ask whether the seller is already in default and, if so, whether a foreclosure auction date is scheduled. The last thing you want to do is spend a couple of months committed to a short sale only to find out that a foreclosure date is imminent. Finally, it is always a good idea to ask the seller why they are seeking a short sale. Although the seller does not need to provide specific details, the buyer does have a right to know whether the seller has a lender approved hardship and, therefore, whether they even qualify for a short sale. If the listing agent or third-party negotiator cannot answer these basic questions, it is highly unlikely that they have enough short sale experience to get your short sale closed.

    2. Manage Your Buyer's Expectations

     Once you determine that the seller is a qualified short sale candidate, you should next turn your attention your client, the buyer. You should immediately provide the buyer with a reasonable short sale time-line. By doing this, you not only show the buyer that you have done your homework, but you also ensure that all parties are on the same page from the outset of the transaction. On the most basic level, all short sales consist of three stages: (1) offer (2) valuation and (3) negotiation. Thus, if you provide a reasonable estimate of how long each stage will take, it is much more likely that your buyer will remain a party to the transaction, even if an unexpected event occurs, such as the loan being transferred to a new servicer or the lender grossly overvaluing the property. Both of which, by the way, have happened to me. If, however, the buyer enters the transaction with the expectation that the short sale will be approved in one month, the lender never has a reasonable opportunity to complete the short sale approval process. An offer that expires in thirty days is not a strong offer and most likely not the "highest and best" offer because it never has a fighting chance to close. Instead, the buyer and seller should mutually agree upon a time period in which they reasonably expect the short approval to be obtained. That way, all parties are on the same page from the outset of the transaction. The simple task of providing the buyer with a short sale time-line will not only manage the buyer's expectations, but will also discourage casual purchasers from making an offer on a short sale property.

    3. Eliminate All Contingencies In The Contract

     Simply put, short sale lenders do not like contingencies. The only exception to this rule is the mortgage financing clause and, even in that case, the buyer will have to submit a pre-approval or proof of funds letter showing that they will be able to eliminate the financing contingency shortly after receiving short sale approval. Thus, if you represent a buyer who needs to sell their current home prior to purchasing another, your client should not be looking at short sales. Another common contingency, and a source of contention, involves the property inspection. Most buyer's agents insist upon conducting the inspection after the lender approves the short sale. Most listing agents, however, don't like this because it gives the buyer the ability to walk away from the transaction at any time, without cause. In my opinion, an offer that enables the buyer to walk away at anytime is likely not the “highest and best” offer because the buyer is not committing to purchase the property subject only to short sale approval. The post approval inspection gives the buyer another opportunity to back out of the purchase with little or no penalty. The seller, on the other hand, is unequivocally making a commitment to the buyer because they effectively take the property off of the market once they submit the signed offer to their lender. Admittedly, I understand why buyers may want to not want to spend a few hundred dollars up-front on an inspection, but you could easily make the argument that this decision potentially costs the buyer more money in the long run. Keep in mind, once you submit the offer to the lender, you forfeit your right to adjust the purchase price. If you are buying an “As Is” property, such as a short sale, wouldn't you rather take into account all necessary property information prior to submitting your offer to to the bank? In other words, wouldn't it be in the buyer's best interest to find out whether there are any major property condition issues prior to committing to the transaction for 60-90 days? More often than not, a short sale fails because the buyer walks away as a result of the property inspection, not because the seller was unable to obtain short sale approval. Regardless of your point of view, it is always best to deal with the inspection contingency issue at the outset of the short sale transaction so as to avoid any potential disagreements between the buyer and seller.

    4. Make Sure Buyer Is Prepared To Close Upon Receipt Of Short Sale Approval

    Most short sale approval letters are only valid for 30-45 days, and the majority of buyers make the mistake of waiting until receipt of the short sale approval letter before they initiate the financing process. In today's market, it is virtually impossible for a buyer to obtain mortgage financing during this time frame. Moreover, simply obtaining a pre-approval letter from your buyer's lender is insufficient. Anyone with an email address can obtain a pre-approval letter. As the buyer's agent, you need to initiate contact with your buyer's lender and confirm whether they will be able to close within 30-45 days of receiving the short sale approval letter. I always ask the buyer's lender for a list of conditions that need to be satisfied in order to receive a firm mortgage commitment. Next, I make certain that the buyer completes as many of these tasks as possible during the time in which I am working on getting the short sale approved. This way, the buyer simply needs to update their financial information and conduct the appraisal in order to finalize their financing. While most short sale lenders will grant an extension, they are harder and harder to obtain, and in some cases the seller is required to update their financial documents and re-submit the entire file to the investor for review. In my opinion, it is much more efficient, and doesn't cost the buyer anything, if they eliminate all financing conditions during the short sale approval process rather than waiting until the short sale is approved.

    5. Be Prepared to Negotiate and Engage The Use of a Professional

    If you haven't figured it out by now, short sales require the cooperation of all parties involved. Unlike a conventional sale, where the process is primarily adversarial, the buyer and the seller must work together during a short sale in order to get the deal approved. This includes the negotiation. Everybody knows that lenders prefer short sales to foreclosures, but they are not going to give the property away for less than what they deem as fair market value. By agreeing to the short sale, the lender is trying to mitigate their losses. As a result, the lender is going to attempt to cut their losses wherever possible. The most common method is to reduce real estate commissions or seller paid closing fees. Lenders also try to minimize their loss by demanding a cash contribution or promissory note at closing. This is where it pays to engage the use of a short sale professional, even if you are the buyer's agent. The short sale lender typically pays the negotiator's fee, so why wouldn't you take advantage of the negotiator's expertise? Furthermore, by encouraging your client to use an experienced short sale negotiator, you are showing the seller that you are committed to the purchase and taking the necessary steps to get the deal closed as efficiently and effectively as possible. The short sale negotiator should be able to leverage their expertise and get the lender to agree to the short sale with minimal financial damage to all parties. A good negotiator is one that it is able to convince the lender that the proposed offer will result in less of a loss than a foreclosure, while at the same time getting the buyer their desired purchase price and, most important, getting the seller out of a bad situation with minimal credit damage an no deficiency balance owed following the short sale. All parties must be willing to negotiate and showing the lender that everyone is willing to make concessions will greatly increase the likelihood of getting your short sale closed.

    Related Posts:

    Five Tips For Listing Agents To Ensure Short Sale Approval

    How To Keep Buyers A Party To A Massachusetts Short Sale Without A Signed Purchase Contract

    Five Things To Avoid When Writing Your Short Sale Hardship Letter

    About the Author: Andrew Coppo of  Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

    If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call my office to schedule a meeting or a telephone consultation at (617)264-0376.

  • Massachusetts Short Sales: Five Listing Agent Tips To Ensure Short Sale Approval

    Posted Under: Home Buying in Massachusetts, Home Selling in Massachusetts, Foreclosure in Massachusetts  |  December 3, 2011 9:27 AM  |  271 views  |  No comments

    According to a recent report by California based RealtyTrac, distressed propertiesFive Listing Agent Tips To Ensure Short Sale Approval accounted for one third of all US housing sales in the second quarter of 2011. The glut of inventory is only going to increase as lenders slowly bounce back from the robosigning crisis and foreclosure filings begin to pick up around the country. A large portion of distressed sales are undoubtedly pre-foreclosure sales, or short sales. If you are a real estate professional, odds are that you worked on a short sale transaction in 2011. For those real estate agents who are yet to work on a short sale, you can no longer afford to ignore this segment of the housing market. If you are refusing to work on short sales, you are ignoring nearly 1/3 of your potential earnings. What makes these transactions so difficult is that every short sale is unique. The housing market is not getting better anytime soon, and short sales will likely account for a large portion of all housing sales in the next few years.  Below are five things a listing agent should do on all Massachusetts short sales in order to ensure a successful transaction.

    1. Ask The Homeowner Specific Questions Prior To Accepting The Listing

    Contrary to popular opinion, a homeowner does not automatically qualify for a short sale just because the amount they owe on their mortgage is greater than fair market value of their home. All short sale lenders require a financial hardship, yet very few listing agents ask the homeowner why they are requesting a short sale. As a listing agent, it is imperative that you first determine whether the homeowner qualifies for a short sale. Once you determine that your seller is a qualified short sale candidate, it is equally important to inquire as to the status of the foreclosure process. Most lenders no longer require homeowners to be delinquent on their mortgage in order to initiate a short sale, but the last thing you want to do is spend time working on the transaction if the foreclosure auction is imminent. A large percentage of all short sales that fail get denied because the seller is unable to postpone the foreclosure auction. Short sales are complex transactions that can be very frustrating for inexperienced real estate agents, but taking the initial steps of asking why the seller is pursuing a short sale, as well as making sure that a foreclosure auction isn't scheduled, will greatly increase your chances of closing the deal.

    2. Ascertain The Amount and Identity Of All Lien Holders

    The listing agent should always ask the seller how many loans are on the property. You must obtain short sale approval from each lien holder. Thus, the more lien holders, the more complex the short sale transaction. Furthermore, the primary lien holders must agree, or at least approve, all payoff amounts to subsequent lien holders. Keep in mind that all lien holders need to approve the short sale, not just the lenders, so it is important to inquire as to any potential tax liens, unpaid condominium fees and any other debts the homeowner may have that could prevent you from obtaining short sale approval. It is equally important to identify the lenders from whom you will be requesting a short sale. All lenders have specific short sale procedures. Some lenders can process a short sale request in as little as 30 days, while others can take months to respond. Thus, by identifying the lien holder, a listing agent can take a lot of the guesswork out of a short sale transaction by simply ascertaining the identity and amount of lien holders.

    3. Submit A Complete Short Sale Package

    One of the biggest mistakes a listing agent can make is submitting an incomplete short sale package to the lender. Lenders receive hundreds of short sale requests every day. Upon submitting a complete package to the lender, the file is immediately assigned to a short sale negotiator. The sooner your file is with a negotiator, the faster he or she will schedule the lender's appraisal. In contrast, if you submit an incomplete short sale package to the lender, your short sale is dead in the water. At that point, the only way to get someone to work on your file is to get a customer service representative to grant a review of the previously submitted documents. By the time that happens, most of the homeowner's financial documents will have expired and you will be asked to re-submit those items. Most lenders can process a complete short sale package in the first 30-45 days, but the clock doesn't start ticking until they receive a complete short sale package. If you make the mistake of submitting an incomplete short sale package, you make the short sale process infinitely harder than it needs to be.

    4. Attend The Lender's Appraisal

    One of the most common short sale misconceptions is the belief that the lender calculates the potential loss as the total amount owed on the mortgage minus the short sale offer price. Instead, when you apply for a short sale, the lender is making the determination as to whether a short sale or foreclosure will result in a greater loss to the investor. In order to make this conclusion, the lender sends a representative, usually a local real estate agent, to come up with a fair market value of the property. Once the fair market value is assigned to the property, the lender uses this figure as the amount they expect to recoup if they sell the property at foreclosure. Consequently, if the short sale offer price is at least within the ballpark of the lender's appraised value, the lender will approve the short sale because they can recoup the same amount of money without having to incur additional legal and carrying costs associated with a foreclosure.  In other words, the entire short sale transaction hinges on the result of an independent third-party property valuation conducted by a local real estate agent on behalf of the lender. As a result, the listing agent can greatly improve the likelihood of getting their short sale approved simply by attending the appraisal and presenting the lender's representative with current market data and property condition issues that substantiate the current offer price.

    5. Manage The Buyer's Expectations

    Aside from a foreclosure auction, the most common reason that a Massachusetts short sale fails is due to the buyer walking away from the transaction prior to obtaining short sale approval. While there are some stepsthe listing agent can take to prevent the buyer from walking away, the most effective method to keep a buyer a party to the transaction is through constant communication and managing the buyer's expectations. As long as you are familiar with the lender's short sale process and you submit a complete short sale package, you should be able to provide the buyer's agent with an accurate estimate of how long the short sale approval should take at the outset of the transaction. This way, the buyer does not have unrealistic expectations and they are more likely to remain a party to the transaction, even when unforeseen events occur. As a short sale negotiator, there is nothing more frustrating than working on a file for 30-45 days only to have the buyer walk away days before obtaining short sale approval.

    Related Posts:

    Five Things To Avoid When Writing Your Short Sale Hardship Letter

    How Does A Short Sale Affect Your Credit Score?

    Short Sale Tax Consequences: Understanding The Qualified Principal Residence Exception

    About the Author: Andrew Coppo of  Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today at (617) 264-0376 if you are a homeowner facing foreclosure or a Realtor seeking assistance with a Massachusetts short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

  • How Does A Short Sale Affect Your Credit Score?

    Posted Under: Home Selling in Massachusetts, Foreclosure in Massachusetts, Credit Score in Massachusetts  |  July 13, 2011 3:20 PM  |  324 views  |  1 comment

    Foreclosure vs. Short Sale: Which Option Is Best For My Credit Score?

    As someone who deals with homeowners facing foreclosure on a daily basis, I am often asked whether a short sale or foreclosure results in more damage to your credit. Unfortunately, there is no straight- forward answer. The reason why this is such a difficult question to answer is simply because it depends upon a variety of factors. In general, a short sale or foreclosure will affect your credit score 85-160 points. Many mistakenly believe, or are mis-informed, that a derogatory credit event such as a foreclosure is somehow worse than asking your lender to accept a short sale. In the world of credit scores, however, lenders interpret both of these events the same way: the customer did not pay as agreed. The degree to which your credit score will immediately be affected depends largely upon how delinquent you are on your payments at the time of the short sale or foreclosure. Neither event is “better” because they both seriously damage your credit and reflect your inability to repay a debt. With regard to the actual affect to your credit score, you can take proactive measures to mitigate the negative effect to your credit score. In order to understand why this is true, it is important to first examine how your credit score is calculated.

    Credit ScoresHow Much Does A Short Sale Affect Your Credit?

    What Is A Credit Score?

    Each of the three major credit bureaus (Equifax, Experian, and TransUnion) collect information about your practices of borrowing and paying back credit. This information is compiled into a credit report, from which a credit score is calculated. While there are multiple formulas for calculating credit scores, the formulas introduced by the Fair Isaac Corporation (FICO) are the most widely used. This term is commonly referred to as your FICO score. All of these scores can be a bit confusing, so it might be useful just to think of “credit score” as a numeric grade of your credit history. Fair Isaac recently released a report stating that credit scores are affected nearly the same whether you go through a foreclosure or short sale. The report stated that the average points lost on a FICO score are as follows. Here are Fair Isaac & Co.'s tables:

    Harm to FICO score

     Consumer AConsumer BConsumer C
    Starting FICO score~680~720~780
    FICO score after these events:
       30 days late on mortgage600-620630-650670-690
       90 days late on mortgage600-620610-630650-670
       Short sale / deed-in-lieu / settlement (no deficiency balance)610-630605-625655-675
       Short sale (with deficiency balance)575-595570-590620-640
       Foreclosure575-595570-590620-640
       Bankruptcy530-550525-545540-560

     

    Time to Full Recovery

     Consumer AConsumer BConsumer C
    Starting FICO score~680~720~780
    FICO score after these events:
       30 days late on mortgage~9 months~2.5 years~3 years
       90 days late on mortgage~9 months~3 years~7 years
       Short sale / deed-in-lieu / settlement (no deficiency balance)~3 years~7 years~7 years
       Short sale (with deficiency balance)~3 years~7 years~7 years
       Foreclosure~3 years~7 years~7 years
       Bankruptcy~5 years~7-10 years~7-10 years

     

    As stated above, the FICO score treats a foreclosure, short sale or deed in lieu of foreclosure exactly the same. They are all treated as “serious delinquencies.” Serious delinquencies are characterized by being in default a minimum of 60 days. Making matters worse, credit reports are limited in how they represent foreclosures, so it is generally impossible to tell from the face of the credit report if a reported derogatory event is a foreclosure, short sale, deed in lieu of foreclosure, settled account or some other variation.

    How Are Short Sales Reported To The Credit Bureaus?

    As stated in the previous section, FICO does not differentiate between a foreclosure or a short sale. Further complicating matters, lenders don't have a uniform standard as to how they report a short sale to the credit bureaus. Some lenders report short sales as “settled as agreed” while others may report it as “account legally paid in full for less than the full balance.” In some cases, if the account is more than 120 days past due, the short sale will automatically show up as a “foreclosure” on the credit report. As a result, except in limited circumstances, the credit agencies typically treat foreclosures and short sales exactly the same.

    According to the FICO guidelines, the most determinative credit score factor is being able to stay current on your account, or only slightly delinquent, in the months leading up to the derogatory credit event. By doing so, you thereby minimize the damage to your credit score by avoiding any serious delinquencies. This is not to be confused with your ability to purchase a home following a short sale or foreclosure, the mere existence of either event on your credit report will generally preclude you from buying a home for two to five years, respectively. Your credit score, however, will only be affected to the degree that you are delinquent on your payments.

    Facts About Short Sales And Credit Scores

    As previously mentioned, foreclosures and short sales have very similar effects on your credit because both events are reported to the credit bureaus as “serious delinquencies.” The degree to which your credit is affected depends upon how delinquent you were on your payments before the derogatory credit event occurred. Thus, a homeowner who stops making payments at the beginning of the short sale process will have a very similar credit score effect as those who go through foreclosure because, on average, a short sale takes three to six months to complete and your credit continues to tank with each successive late payment. Each missed payment negatively impacts your credit score regardless of whether the house is sold as a short sale or foreclosure. As a result, your credit will be seriously damaged by either event if you allow yourself to become seriously delinquent.

    Your credit score can only start improving when the late payments stop and you divest yourself of the home. Until recently, most lenders required homeowners to be delinquent on your payments in order to qualify for a short sale. This is no longer the case. Consequently, a homeowner could theoretically short sell their property without being considered seriously delinquent, and therefore suffer minimal credit damage. In contrast, a homeowner who goes through a foreclosure will be at least 90 days delinquent. Whether you will be able to purchase a home anytime soon is another story, and perhaps my next blog post, but from a credit score perspective, it is possible to mitigate the damage to your credit score by avoiding a "serious delinquency." In all other cases, however, a short sale will affect your credit exactly the same as a foreclosure.

    Myth: Short Sales Are Better For Your Credit Than A Foreclosure

    It matters not to a lender why you failed to make your mortgage payments, only that you did. Lenders go to great lengths to alert each other, by way of reporting to credit bureaus, that the defaulting homeowner is someone who could not make their payment obligations. Thus, unless you can avoid being “seriously delinquent”, there is no credit score advantage to a short sale over foreclosure. A consumer's FICO score will take a huge hit either way until responsible credit behavior supplants the foreclosure or short sale over a period of time. If you are able to minimize the immediate damage to your credit score, this will allow you to obtain credit, such as auto loans or credit cards, thereby putting you on the road to credit recovery faster than those who suffered a serious delinquency. With regard to buying your next home, the nation’s two largest mortgage investors, Fannie Mae and Freddie Mac, with certain exceptions, won’t lend to you again for five years (foreclosure) and two years (short sale).

    Related Posts:

    Short Sale Tax Consequences: Understanding The Qualified Principal Residence Exception

    The Mortgage Forgiveness Debt Relief Act

    How To Qualify For A Short Sale: The Involuntary Hardship

    About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

    If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376

    How Does A Short Sale Affect Your Credit Score?

  • How To Qualify For A Massachusetts Short Sale: The Involuntary Hardship

    Posted Under: Home Buying in Massachusetts, Home Selling in Massachusetts, Foreclosure in Massachusetts  |  June 15, 2011 10:19 AM  |  270 views  |  No comments

    As someone who exclusively negotiatesMassachusetts short sales, I receive about three to five new short sale referrals every week from local real estate agents or distressed homeowners. While it may come as a surprise, I actually reject quite a few of these short sale requests. The most common reason I refuse to submit a short sale package to the lender is due to an insufficient homeowner hardship. In order to qualify for a short sale, all lenders require a financial hardship. More specifically, most lenders require an involuntary hardship. An involuntary hardship is some event, beyond the homeowner's control, that caused the mortgage payments to become unaffordable, even if only temporarily.

    For example, a loss of job or curtailment of income is a lender approved hardship. It is important to note, however, that most lenders distinguish between someone who lost their job and someone who voluntarily quit their job. Even if you are able to prove to your lender that you are no longer able to make your mortgage payments, you still need to prove that your inability to make the payments was involuntary. Thus, unless you are able to prove that you were forced to leave your job, or asked by your employer to take a significant pay cut, a change of employment status may not automatically qualify you for a short sale. Furthermore, many homeowners have suffered multiple hardships, and it can be difficult deciding which hardship you should present to your lender when requesting a short sale. In all of my short sales, the most successful cases are those in which the homeowner is able to show that the hardship reason was involuntary and beyond their control. A good hardship letter will list all of the reasons, but the most effective letters focus on the involuntary hardship.

    Due to the recent foreclosure problems in Massachusetts, lenders have bolstered their loss mitigation departments and are approving more short sales than ever before. Most lenders have a list of approved hardships which act as a benchmark for individuals contemplating a short sale.There are, however, many situations which may not automatically qualify as a lender approved hardship and need to be examined on a case by case basis. As someone who only gets paid upon a successful completion of a short sale, I use my experience to analyze each homeowner's situation, coupled with their specific lender's hardship requirements, to determine whether their short sale request is likely to be approved. This way, I don't waste my time, the lender's time, and most importantly, the homeowner's time if a short sale is not a viable option.

    Editor's note: To every rule, there is always an exception. Some lenders may not be subject to investor restrictions or servicing agreements and merely want to get rid of a non-performing asset. As a result, these lenders do not require an involuntary hardship and merely require the financial inability to pay the mortgage. If you are in the Greater Boston area and are considering a short sale, please contact us today and we can quickly determine whether a short sale is right for you or your client.


    About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists homeowners, Realtors and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimerHERE.


 
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