What is the advantages of a short sale vs just giving the keys to a house to the bank if seriously underwater (>30%) on the mortgage?

Asked by Parlin56, 94583 Sun Feb 12, 2012

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Steven Ornellas’ answer
Steven Ornel…, Agent, Fremont, CA
Sun Feb 12, 2012
Parlin56:

Going the route of a foreclosure at this point may mean that you lose your "forgiveness of debt" protection. The forgiveness of debt is typically considered income in the eyes of the IRS; however, the federal Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their PRINCIPAL residence. This is set to expire 12/31/12. CA law is in line with the federal law. You do not want to take the chance of the lender not foreclosing before this deadline.



SB458 became law on 7/15/11. This law prevents a deficiency judgment after a short sale in most cases on ANY Trust Deeds on one-to-four residential units. You can read more about the new law here:

"CA Senate Bill 458 Now Prohibits 1st/2nd Deficiency Judgments*"
http://www.trulia.com/blog/steve_ornellas_mba_re_mastersgri/…

As a summary, where applicable, a mortgage lender involved in a SHORT SALE (as opposed to a judicial foreclosure) is now PROHIBITED from engaging in any of the following acts:

1) Collecting a deficiency,
2) Having a borrower owe a deficiency,
3) Requesting a deficiency judgment,
4) Having a court render a deficiency judgment, or
5) Requiring the borrower to pay ANY additional compensation, aside from the proceeds of the sale, in exchange for written consent to the short sale.

EXCEPTIONS:
1) A Lender seeking damages for fraud or waste;
2) the borrower is a corporation, LLC, or limited partnership;
3) cross-collateralized loan (special rules apply, not very common);
4) Borrower is a political subdivision of the state;
5) a bond lien; or, a public utility lien.



Another "benefit" of a Short Sale has to do with your ability to repurchase a home.

FHA financing normally requires THREE years from the short sale; HOWEVER, IF 1) the mortgage payments were made on time within the 12 months prior to the short sale, and 2) you aren't looking to purchasing a similar or larger home in the same area as short sale you can actually buy the very NEXT DAY after escrow closes on your Short Sale.

Conforming loan guidelines state a minimum of TWO years and 20% down; however, if the short sale was due to documentable "extenuating circumstances" (divorce, medical, job loss, death of a wage earner, etc.) then you only need 10% down.

-Steve
3 votes
Suzanne Look…, Agent, Lafayette, CA
Sun Feb 12, 2012
BEST ANSWER
Hi Parlin56,

The real answer should come from either an accountant or your CPA. From a realtor's perspective, we are told that a short sale may shorten the time you are able to purchase another property. A foreclosure may make the waiting period longer. This is realitive to the hit on your credit score.

There is no guarantee that you will get a short sale approved, since it is up to your lender(s), but most banks have a much better system in place than they did years ago. There is also pressure from the government to try and short sale homes instead of having them go into foreclosure.

All of this and much more detail can be discussed in person once you decide on who you would like to use as a realtor. Make sure they have experience with short sales if you go that direction.

Regards,
Suzanne Looker
Web Reference:  http://www.suzannelooker.com
2 votes
Scott Summers, , San Ramon, CA
Sun Feb 12, 2012
A foreclosure can affect a homeowner in the following ways:
1 It affects their ability to get a job and/ or keep their current job. A Short Sale does not have this affect
2 Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. A Short Sale does not have this affect
3 The homeowner loses the ability to purchase a home with a Fannie Mae loan for 5 years. A Short Sale is 2 years
4 On any future loan application the homeowner will have to answer yes to the foreclosure question, and will affect their credit rate. Short Sale is not mentioned on the standard loan application.
5 A foreclosure can lower a credit score 250 to 300 points greater than a short sale
1 vote
Christina "C…, Agent, Plantation, FL
Wed Aug 5, 2015
Hi, If you are working with a competent Realtor who knows the process, in most cases, you will be way out ahead if you do the short sale. With a short sale, we can in many cases not only sell your home, and save you from the negative dings of foreclosure pn your credit, we can also get you some cash for "keys".... In most cases, we also get the deficiency judgment waived, so you do not owe the bank any money once we are finished. I work with an attorney who helps streamline the process and keeps you out of bankruptcy while we go through the process. I generally prepare all the paperwork and stay on top of the attorney who will be speaking with the bank. As a team, we get it done. Most banks are much better today, than years ago. However, the homeowner gets very little respect from the banks, so work with a professional who knows the system, and will get you through the process.
0 votes
Bob Georgiou, Agent, Danville, CA
Wed Feb 15, 2012
All of these answers apply if you can make sense of it. The reality of a short sale is going to depend on your situation. If you have MI and/or the investor on you loan is the greedy type, a short sale mau not even be possible. Unfortunately the people who setup the current system never planned for the system to collapse so the only way to find out is to execute a short sale and see what happens. REgardless of what the conventional rules are. There are many intitutional investors who are working with distressed non-owner occupied loans in order to improve their portfolio's.
Web Reference:  http://bob2sell.com
0 votes
Minna Reid, Agent, Trumbull, CT
Mon Feb 13, 2012
If by "giving your keys back" you mean a deed in lieu, the lender has to approve this. The lender will likely force you to attempt a short sale before they will do a DIL. Also if you have more than one loan, a DIL is not an option for you.
Web Reference:  http://www.homesbyminna.com
0 votes
Patrick McCa…, Agent, Walnut Creek, CA
Sun Feb 12, 2012
I concur with most of the answers here. I usually recommend a Short Sale over foreclosure because it helps put you the owner in control. There is no firm timetable on when a lender will complete the foreclosure and therefore you may loose the debt forgiveness in regards to the income taxes. In addition there is the impeding unknown of when you will get the knock on the door that tells you it is time to leave. If you do not mind "living on the edge” there a number of methods for delaying the foreclosure, however if you want to move on and start the next stage of you life then a Short Sale is more than likely the answer for you. The effects on your credit score are debatable and depend largely on how the lender reports it to the bureaus. A short Sale is the proactive approach and most credit agencies score it as such. It is important to note that most employment and rental applications will ask if you have ever had a foreclosure.

Now is the time to decide to use the debt forgiveness act and get the clock ticking so you can be that much closer to re-purchasing a home in the future. Continuing to cling to a toxic asset may not be the right choice for you. Get the facts and know your options then make the right decision based on your situation.


This answer offered is for general informational purposes only to provide general answers to general questions and does not constitute legal or tax advice
0 votes
Steven Ornel…, Agent, Fremont, CA
Sun Feb 12, 2012
Parlin56:

I completly AGREE with all that have suggested you speak with a CPA and Tax Attorney! You should seek advice specifically regarding your individual circumstances.
0 votes
Sally Blaze, Agent, Pleasanton, CA
Sun Feb 12, 2012
Parlin56:
Talk to a tax attorney, real estate attorney or your financial lender regarding the tax, income, and life consequences of your options.

Sally Blaze
Realtor
Alain Pinel
DRE#01856137
925-998-1284
sblaze@apr.com
0 votes
Steven Ornel…, Agent, Fremont, CA
Sun Feb 12, 2012
Parlin56:

One other important point to note re: impact to credit after a distressed sale - it's simply a "moving target"!

"How Foreclosure Impacts Your Credit Score" 4/22/10
http://docs.Steven-Anthony.com/FairIsaacCreditScoreHits.pdf

"Foreclosure, Short Sale, deed-in-lieu: 85-160"


"Research looks at how mortgage delinquencies affect scores." 3/24/11
http://docs.Steven-Anthony.com/FICO-DistressedSaleImpact.pdf

"... no significant difference in score impact between short sale/deed-in-lieu/settlement and foreclosure."

-Steve
0 votes
John Arendsen, Agent, Leucadia, CA
Sun Feb 12, 2012
Great advice below. Short sale vs foreclosure anyday if you cherish your credit.
0 votes
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