Short Sales
Many people are caught in situations where they owe more than
their home is worth. Many times with adjustable rate mortgages,
homeowners find that their payments are going up….up…. up and they
can no longer afford the home. For most, refinancing the mortgage is
not an option when the home is valued far less than they originally
paid.
Sometimes the only way a homeowner can sell their property and try
to salvage their credit is through a short sale. A homeowner must
prove hardship to their lender such as a job loss, illness, divorce
or something out of the ordinary that has caused them to get behind
and not be able to make their mortgage payments.
A short sale is selling a home short of what is owed on the mortgage. Many lenders are willing to accept a short sale and forgive the rest of what is owed if the homeowner can no longer make their payments or the home is worth less than what is owed. Another reason may be that the home has been for sale for awhile and has had no offers or low offers. Your lender must agree to negotiate a short sale with you. If you are behind on your payments call your lender and ask to speak with the loss mitigation department. Tell them your situation and ask what they need from you in order to accept a short sale on your property. If you are working with an agent, give them written authorization to speak on your behalf to work out a short sale agreement with your lender. Your agent should ask for a 90-120 day forbearance to stop any foreclosure actions from proceeding. This will give you the time needed to find a buyer for your property. Without the forbearance, the bank will proceed with the foreclosure action. While there is still no guarantee that you will be able to sell, it usually is the best alternative.
Why a short sale?
The lender has many advantages to a short sale. By accepting a short
sale, the lender will avoid the lengthy and costly foreclosure
procedures. It cost the lender a lot of money in attorney fees,
court costs, holding costs, repairs and so forth to take back a
property. Once the property is sitting vacant it can lose more value
due to neglect, vandalism and damage done by angry homeowners.
Usually it is less costly to a lender to do a short sale than a
foreclosure.
Your Credit Score
One thing to consider is your credit score. A
short sale will not cause as much damage to your credit score as a
foreclosure will. A short sale will typically make your score
go down 100 points. Your credit can be rebuilt within 18 months. A
foreclosure will stay on your credit report for 10 years and
typically will make your credit score go down 200 to 300 points. You
need to check with your financial advisor to see if you will be
liable for taxes on the difference between the sale amount and the
original loan amount.
Deficiency Judgments
A deficiency judgment is the remaining debt owed on the property.
Example-Your home sold for $200,000.00 but the actual payoff on the
note was $230,000.00. Your deficiency judgment could be $30,000.00.
You can negotiate with your lender to release the deficiency
judgment and consider the obligation to be paid in full. Talk with a
tax advisor to make sure you will not owe federal taxes on the
amount forgiven. Make sure that you get a
release of the deficiency judgment in writing from your lender.
Paperwork
Involved
Your lender will want you to fill out a financial package for them.
Usually it includes:
• 2 yrs of your most recent IRS tax returns
• 2-3 months bank statements
• 2-3 months pay stubs
• A hardship letter explaining why you got behind in the payments
and why you feel you can no longer make the payments.
Many people are facing foreclosure today. While it is a very
stressful time for anyone who is facing this hardship, remember that
you do have options. Look at all your
options and weigh each one carefully. You must do what is right for
you and your circumstances. Getting
professional advice from an attorney, tax accountant and Real Estate
Agent can help the process go more smoothly.
