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J Robert Gamboa's Blog

By J Robert Gamboa | Agent in Palm Beach Gardens, FL

What is a short sale?

Short Sales – A Homeowner Overview

Headlines regarding foreclosures and short sales dominate the news almost daily. Five years after the collapse of the South Florida real estate market the number of properties still going into foreclosure and the number of homeowners whose homes are at risk is staggering! In many cases, a short sale solution can save a homeowner from having the devastating foreclosure blemish on their credit and the deficiency judgment granted to the Lender by the court system. Payment of outstanding property taxes and delinquent HOA fees are typically paid from the proceeds of the sale.

What is a Short Sale?

A “Short Sale” is when all parties holding liens against a property agree to accept less than is owed to allow sale of the collateral. Basically, the lenders and any other lien holders agree to the sale of  a property for less than what is owed to them. Why would a lender agree to this? Because of the decline in property values many properties do not have any equity left in them. And, due to the increase in property taxes and insurance as well as adjustable rate mortgage resets plus any unexpected hardships such as job loss or illness that a homeowner may encounter, many homeowners can no longer make their monthly mortgage payments.

A short sale benefits the lenders as they do not have to take back and resell a house with all theforeclosure and holding costs that are incurred. Lenders are in the money business not the real estate business.

What are the Benefits to me?

1. A short sale greatly reduces the damage done to your credit.

A short sale results in the paid-off mortgage noted on a credit report as “settled” or “satisfied in full but for less than the full amount” or something similar. This is scored by the credit models as a paid collection account, and along with the late payments listed will cause your credit score to drop in the short term but within 12-24 months will have very little or no effect at all on your credit score.

2. You avoid having a “Foreclosure” recorded on your credit report.

A foreclosure is an event recorded in the Public Records that stays on your credit report for 7 years. The judgment (deficiency balance) reported with it is valid for 10 years and can be renewed for an additional 10 years at the lender’s request. Although a bankruptcy can erase a deficiency balance the foreclosure event remains on your credit and in terms of credit “hits” the most damaging.

3. With a short sale you will likely avoid a Deficiency Judgment.

First mortgages sold short are typically written off unlike a foreclosure. When a short sale occurs the balance of the mortgage not satisfied with the proceeds of the sale (the deficiency) is written off in most cases.

4. There is no cost to you.

The Realtor’s commissions and any processing fees are paid by the lender or other interested party at the time of sale.

What are the Consequences to Me?

1. Possible consequences are the issuance of a “1099-C” by the lender.

If the property is your primary residence and your lender “writes off” the deficiency (the difference between what was owed to your lender and what they received) the lender will issue you a 1099-C. On December 20, 2007, President Bush signed H.R. 3648 “The Mortgage Forgiveness Debt Relief Act of

2007”. This bill benefits homeowners who participate in a short sale or foreclosure of their primary residence. Under current law, if the value of a property declines and a lender forgives a portion of the mortgage upon the sale of the property, the tax code treats the amount forgiven as income that can be taxed. This bill has created a “tax forgiveness window” through 2013 that allows most homeowners to pay no taxes on any debt forgiveness they receive from the short sale of their primary residence. Certain restrictions apply. If the property is not your primary residence and you are issued a “1099-C” for the difference between what was owed to your lenders and what they received, it will be reported as income to you from the cancellation of a debt and may be taxable if your assets exceed your liabilities at the time of the sale. That generally isn’t the case or the bank won’t approve the short sale anyway.To address this issue, IRS Form 982 can be used when filing taxes to exclude the amount of discharged debt from the homeowner’s income resulting from the issuance of a 1099-C. There is also an IRS publication entitled “Questions and Answers on Home Foreclosure and Debt Cancellation”. We suggest that you consult with your accountant or tax attorney and if he/she is not aware of Form 982 then give him/her a copy to review.

2. Another uncommon but possible consequence is a Deficiency Judgment.

The lender has the option of issuing either a 1099-C or retaining the debt but not both. A deficiency judgment is a judgment filed in the public records for the difference between what was owed and what was received by the lender. Your Lender would have to file a lawsuit in court in order to get a judgment.

Am I a Candidate for a Short Sale?

Before considering a short sale, the lenders will evaluate both the homeowner and the property. They will request documents to review that will allow them to determine whether to accept, reject, or counter the short sale offer. The following outlines what the lender will be asking while reviewing the short sale package.

Borrower (Homeowner) Profile
1. Does the homeowner have sufficient monthly income to make the monthly mortgage payments after reasonable living expenses?

2. Does the homeowner have assets that can be used to make the mortgage payments? Do liabilities exceed assets?

3. What has happened to cause the homeowner to no longer be able to afford to pay the mortgage? Remember, before being approved for the mortgage you had to prove you could afford to pay the mortgage!

4. Does the homeowner understand that they will not receive any money at closing? If the lender is taking a loss on the property, you, the homeowner, are certainly not going to benefit monetarily.

5. Does the homeowner understand there is no guarantee? (However, we will be working diligently on your behalf).

Property Profile

1. Does the property have any equity? If yes, you can sell the property without a short sale.

2. Does the property require any repairs? If yes, give your Realtor a detailed list of problems.

How do I get started?

1. All lenders require that your property be listed with a Realtor. By choosing Keyes you get a Realtor experienced with the short sale process to ensure the best chance of success.

2. Sign the documents provided by your Realtor.

3. Gather together the remaining documents in the Required Documents Checklist.

4. Once everything is received we will begin processing your short sale.

We are experienced and have a very high rate of closings.

As part of your Short Sale Team, we will work diligently towards a successful short sale.

Let our Experience Work for You!
Please call with any questions 561-282-5272
or email JRobertGamboa@keyes.com

J. Robert Gamboa, Real Estate Advisor/REALTOR

 
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