Its certainly interesting to see the variety of aswers on this blog. Makes you wonder if anyone knows the truth. As a certified short sale specialist Ive been trained by a California real estate attorney with over 25 years experience with short sales. Ive also hired the former head of loss mitigation from Indymac Bank to train me on what the banks are looking for to get these things done,That being said , I myself am not an attorney and what I share here is not legal advice but heres the long and short of it.
1) In most instances its not the short sale itself but the late mortgage payments that will affect your credit. If the lender writes off the debt and issues you a 1099 for the amount of debt forgiven then technically they HAVE TO report it as "paid as agreed" on the credit report. That being said there are a number of people doing short sales that aren't late on thier mortgage that walk away from a short sale totally unscathed (except for whatever they put down on the property when they bought it)
On average when a short sale hits the credit report it will drop the FICO score about 120 pts and it will be 18mos to 2 yrs before you can qualify to buy again. This is substantially better than the alternative of foreclosure, which would hit your credit by 250 pts and take 4 yrs to recover from. BK will be about a 300pt drop and 7 yrs.
2) The IRS tax laws bascially state that if a bank or lender writes off debt owed by you , they are to issue you a 1099 and you are responsible for paying income tax on the amount of debt forgiven (also called phantom income). President Bush signed into law this past december the Mortgage Forgiveness Debt Relief Act of 2007, whereby in certain circumstances, a homeowner does not have to pay federal income tax on debt forgiven on a loan secured by a qualified principal residence. To qualify your primary residentce and it must be a purchase money loan, meaning its the loan you used to buy the property. (in other words if you refinanced and pulled out 50K to buy and SUV and go to Hawaii theyre not going to wave the tax on the debt forgiveness)
If you dont qualify with those guidelines all is not lost. There is a possiblity of getting the taxes due waived if you can have your accountant fill out IRS form 982 and prove that you were temporarily insolvent at the time you sold the property.
3) as for other buyers coming in and submitting an offer after you have accepted one, yes they can. Because the bank is taking a loss, they are entitled to look at other offers to see if they can mitigate their loss even further by approving a better offer. Ultimatley the bank isnt accepting the offfers , merely approving them becuase the purchase contract is an ageement solely between the buyer and seller.
I hope this helps. Whatever you do, if you do decide on a short sale be sure to work with someone who has expereince in successfully getting them done. TBecause of agents general lack of knowldge and training in this area the national stats show less than 10% of short sales getting approved before they go to foreclosure.
For more details on short sales and thier tax, credit and legal implications visit http://www.ThinkJennings.com or request the free report on they 9 alternatives to foreclosure at http://www.youroptionstoforeclosure.com
To answer your questions in the order asked:
A) Yes, the short sale will be reflected on your credit report and will result in a reduction of your credit rating. However a short sale has less impact than a foreclosure would and as long as you continue to fulfill your other credit obligations in a timely manner, recovery from the short sale could be as little as 1 to 2 years as opposed to up to 7 for a foreclosure.
B) You may receive a supplemental tax bill that would treat the difference between what you borrowed and what the property sells for as income and could be taxed on that amount. This is really a question you should address with your tax professional.
C) If you as the lender to allow a short sale you are effectively placing them in the position of "seller" since they will have the ultimate ability to determine which offer they wish to accept and how much of a loss they are willing to allow. With a short sale until the bank/lender decides that which offer they wish to accept, if any, the property remains available for purchase and should continue to be marketed agressively by your Realtor. Other offers can be accepted and should be until the lender says they are ready to move forward to escrow and finally sale.
If you would like additional information, advice or would like to work with a Realtor who has experience working successfully with short sales, please give me a call and I will be happy to see if I can help.
Tisza Major-Posner, Realtor, Keller Williams Claremont/La Verne (909) 837-8922 or (213) 392-4084
B- Depends on the situation. If it is a primary residence there are a certain set of rules v.s an investment property.
C- Not if you have signed a legally and binding agreement with someone else. The bank does not own the home the seller does.
(b) As of Dec 20, 2007 short sales for principle residences will not face a tax on their forgiven debt! See a CPA for more details, or contact me below.
(c) Yes - banks can continue to review offers, but I build a "first right of refusal" into contracts for my buyers
Help for Stressed Owners 24hr pager 877-870-4462
Don't listen to those who are telling you to borrow money to hold onto this prop. How long can you do this--for the next 3-5 years? Get away from this crocodile before it eats you alive. Save your money, and when things settle down in the housing market, and your credit is clear, you'll be in a position to start over with a home you can actually afford. Without having a heart attack! Good luck and...
See the 11.7.07 Wall St. Journal article:
Dump This House: Unloading Your Property in a Slow Market
November 7, 2007; Page D1
It could be the kindest cut of all.
Look at the prices of homes getting sold, and the property market's decline seems no worse than a rough day in the stock market. Look at the number of unsold homes, and you realize there's a world of financial pain out there.
You should talk with your tax advisor about how this will affect you come tax time. The loss is added to your taxable income.
Yes, I'm afraid that a short sale will go on your credit record. It is not as negative as a foreclosure, but is still negative information that will stay with you for 7 years.
Are you going to try a short sale? If there's any alternative, please try it. Can someone in your family loan you money until you are able to refinance? Have you tried to refinance? Call your lending institution and ask for the "loss mitigation" department. If anyone is authorized to help you, they are. I would strongly recommend that you do this before you try a short sale. Short sales are difficult. First you have to get the bank to agree to take market value & agree upon what the value is. You have to disclose that the property is a short sale on the listing which keeps many Realtors from showing the property. Closing the deal often takes several months.
All this being said, if you decide to go with the short sale, I would be very happy to help you. I just hope that you understand what you're getting into.
I wish you the best of luck.
b) You need to consult both real estate tax professional and simply call the IRS for answers.
c) Mostly likely yes because the bank would like to get more money if possible.
Let me know if you need me to refer specialists to you.
Aside from what everybody else has already contributed the specific information for the IRS rules is located here: http://www.irs.gov/individuals/article/0,,id=179414,00.html it is on the IRS website.
You are the seller and you accept or decline offers to present to the bank. Yes, you can have a million clauses and variants placed into the contract to benefit each party but if the amount that the bank wants is not met, it is placed back on the until an offer that meets their appraisal and or bpo is met. Who places it back on market, you and your agent.
The bank wants it sold for a price as close as it can get to market value.
This is the new report from 4/13/2008
(04-13) 04:00 PDT Washington -- The country's two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing "walkaway" trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain.
On March 31, Fannie Mae sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition is for three years.
Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680.
Freddie Mac, Fannie's rival, counts foreclosures as major credit blots for seven years, and a senior official said the company is now aggressively pursuing some walkaway borrowers "to preserve our deficiency rights" where permitted under state law.
The walkaway trend is particularly noteworthy in former housing boom markets - including California, Florida and Nevada - where many homeowners find themselves upside down on their loans, owing tens of thousands more than the current market value of their houses. If they invested little or nothing in down payments, some owners reason, continuing to make payments - even if they can afford to - may be throwing good money after bad.
A number of Web sites have popped up claiming to cut the hassles of bailing out of a mortgage. One company promises that clients "will be able to live in (the) home for up to eight months with no mortgage payments," after paying $895 for a customized plan. The same site says it will provide clients with "legal credit repair" to "improve your FICO scores."
Another Web site claims that "your credit can be repaired and (you will) be able to purchase a house in as few as two years" - after paying a $495 fee. Still another company says walkaways can expect "up to one year living payment free" as the lender goes about filing for foreclosure. That company charges $995 for its how-to-do-it kit.
Fair Isaac Corp. of Minneapolis, developer of the FICO scores used in most mortgage transactions, is unhappy at any suggestion that a foreclosure could be minimized or wiped away in a short period of time. Its scoring model counts foreclosure as a long-standing and severe event, nearly comparable with bankruptcy, with negative consequences for all forms of credit that walkaways might seek to obtain. That includes credit card applications, auto loans, student loans - and even insurance and employment.
FICO spokesman Craig Watts said that the impact of a foreclosure on an individual's score depends heavily on the payment history, length and number of credit trade lines in a consumer's file, but "it is always significant."
Robin Stout Migala, consumer outreach manager for Freddie Mac, said in an interview that "there are so many bad reasons for walking away" from a home loan. Not only are borrowers' credit standings wrecked - forcing them into excessively high interest rates on any credit they can manage to obtain. But they also face other potential problems, including federal income tax liabilities.
Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven. Walkaway borrowers, by contrast, have nothing forgiven, and the IRS may demand income taxes on the balance they never paid, according to Migala.
Many borrowers facing foreclosure today have endured serious financial crises, said Migala - loss of employment, loss of an income-earning spouse, medical issues, predatory loan terms - that led to their inability to make their mortgage payments.
When they apply for a loan from either Freddie Mac or Fannie Mae, she said, the standard application form asks whether they have ever experienced a foreclosure or handed over their deed in lieu of foreclosure.
If applicants check "yes," the loan is immediately shifted to manual underwriting. Every piece of information is scrutinized by underwriters, who probe for the facts surrounding the loss of the house.
For borrowers who faced genuine financial hardships leading to foreclosure, underwriters are likely to be more sympathetic a few years down the road. But if you walk away, here's the deal: Don't expect to get a new home loan - certainly not one with favorable terms - for five to seven years.
*** - That's no matter what some promoter or realtor promised you ." - ***
Everything she said is true except the Tax consequences. If your house is worth less than 2 million and the deficiency (Amount the loan is reduced) is less than $250,000 for an individual or $500,000 for a couple, than you don't have to pay taxes on the 1099C amount. Make sure you find a Tax Accountant that understands this or you will pay taxes you don't need to pay.
For those that keep saying that it will â€œkillâ€ your credit or â€œhit it hardâ€, hereâ€™s the truth, it is the late payments that hit it hard not the short sale itself. You DONâ€T have to be late for the banks to consider a short sale, especially in the current market. You only have to show a condition of â€œImminent Defaultâ€. An example would be that your job transferred you to a different city, you bought a new house, the old house has been listed for 6 months, the value to mortgage ratio is upside down, and you only have enough savings for 2 more payment of the mortgage. If the bank suggests a short sale to you when you talk to them then they consider you already in an imminent default status. The short sale itself has a moderate impact on the credit rating that can be recovered in 2 years or less. Foreclosures take 7 years to recover from and bankruptcies now take 10 years.
If an ARM adjusting is the problem, find someone who can negotiate a loan modification for you or refinance to a fixed rate you can afford. FHA has a new program and will now refinance the exploded ARM payment back to a fixed rate you can afford.
Short Sales are not the cure all, but if done correctly when the circumstances donâ€™t allow any other options except foreclosure or bankruptcy, they are a good alternative.
The bank is the one that will agree on an acceptable amount of the sale. You need to have the patience of Job to go through a short sale...the bank takes months to make a decision.
Maybe you could consider selling your home on a lease with option to buy and be able to save your credit that way.
All my best - wish you well with this!
I re-read my answer and noticed a typo that could make things unclear so I want to make sure that you get the most accurate information. Regarding answer "C" I meant to say "If you ASK the lender to allow a short sale..."
Hope this helps and again, please give me a call as I truly would like to be of service (and I know what I am doing where short sales are concerned :-)
Take care and have a great day!