Short Sales â€“ A Homeowner Overview
Headlines regarding foreclosures and short sales dominate the news almost daily. Five years after theÂ collapse of the South Florida real estate market the number of properties still going into foreclosure andÂ the number of homeowners whose homes are at risk is staggering! In many cases, a short sale solutionÂ can save a homeowner from having the devastating foreclosure blemish on their credit and theÂ deficiency judgment granted to the Lender by the court system. Payment of outstanding property taxesÂ and delinquent HOA fees are typically paid from the proceeds of the sale.
What is a Short Sale?
A â€œShort Saleâ€ is when all parties holding liens against a property agree to accept less than is owed toÂ allow sale of the collateral. Basically, the lenders and any other lien holders agree to the sale of Â aÂ property for less than what is owed to them. Why would a lender agree to this? Because of the declineÂ in property values many properties do not have any equity left in them. And, due to the increase inÂ property taxes and insurance as well as adjustable rate mortgage resets plus any unexpected hardshipsÂ such as job loss or illness that a homeowner may encounter, many homeowners can no longer make theirÂ 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 estateÂ 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 â€œsettledâ€ or â€œsatisfied in full butÂ for less than the full amountâ€ or something similar. This is scored by the credit models as a paidÂ collection account, and along with the late payments listed will cause your credit score to drop in theÂ 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 â€œForeclosureâ€ recorded on your credit report.
A foreclosure is an event recorded in the Public Records that stays on your credit report for 7 years. TheÂ judgment (deficiency balance) reported with it is valid for 10 years and can be renewed for an additionalÂ 10 years at the lenderâ€™s request. Although a bankruptcy can erase a deficiency balance the foreclosureÂ event remains on your credit and in terms of credit â€œhitsâ€ 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 theÂ balance of the mortgage not satisfied with the proceeds of the sale (the deficiency) is written off in mostÂ cases.
4. There is no cost to you.
The Realtorâ€™s commissions and any processing fees are paid by the lender or other interested party at theÂ time of sale.
What are the Consequences to Me?
1. Possible consequences are the issuance of a â€œ1099-Câ€ by the lender.
If the property is your primary residence and your lender â€œwrites offâ€ the deficiency (the differenceÂ between what was owed to your lender and what they received) the lender will issue you a 1099-C. OnÂ December 20, 2007, President Bush signed H.R. 3648 â€œThe Mortgage Forgiveness Debt Relief Act of
2007â€. This bill benefits homeowners who participate in a short sale or foreclosure of their primaryÂ residence. Under current law, if the value of a property declines and a lender forgives a portion of theÂ mortgage upon the sale of the property, the tax code treats the amount forgiven as income that can beÂ taxed. This bill has created a â€œtax forgiveness windowâ€ through 2013 that allows most homeowners toÂ pay no taxes on any debt forgiveness they receive from the short sale of their primary residence. CertainÂ restrictions apply.Â If the property is not your primary residence and you are issued a â€œ1099-Câ€ for the difference betweenÂ what was owed to your lenders and what they received, it will be reported as income to you from theÂ cancellation of a debt and may be taxable if your assets exceed your liabilities at the time of the sale.Â That generally isnâ€™t the case or the bank wonâ€™t approve the short sale anyway.To address this issue, IRS Form 982 can be used when filing taxes to exclude the amount of dischargedÂ debt from the homeownerâ€™s income resulting from the issuance of a 1099-C. There is also an IRSÂ publication entitled â€œQuestions and Answers on Home Foreclosure and Debt Cancellationâ€. We suggestÂ that you consult with your accountant or tax attorney and if he/she is not aware of Form 982 then giveÂ 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 deficiencyÂ judgment is a judgment filed in the public records for the difference between what was owed and whatÂ 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. TheyÂ will request documents to review that will allow them to determine whether to accept, reject, or counterÂ the short sale offer. The following outlines what the lender will be asking while reviewing the short saleÂ package.
1. Does the homeowner have sufficient monthly income to make the monthly mortgage paymentsÂ after reasonable living expenses?
2. Does the homeowner have assets that can be used to make the mortgage payments? DoÂ liabilities exceed assets?
3. What has happened to cause the homeowner to no longer be able to afford to pay the mortgage?Â Remember, before being approved for the mortgage you had to prove you could afford to pay theÂ mortgage!
4. Does the homeowner understand that they will not receive any money at closing? If the lender isÂ 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 diligentlyÂ on your behalf).
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 aÂ 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