We’ll go into more detail below, but first let’s sum up the choices for those who have mortgage balances that exceed the value of their home.
If you’re over-encumbered, and are looking for help – here are your options:
- FORECLOSURE – Quit making payments, and eventually get foreclosed on, probably in the next 6-18 months. You’ll get to live for free in the meantime, and in exchange you’ll end up with a banged-up credit report for the next few years. Lenders say that they will give you a new mortgage 3-4 years after a foreclosure, but only if you fully qualify, have a decent down payment, and had a legitimate hardship.
- SHORT SALE – You can hire an agent and try to sell your house, and convince the mortgage lender(s) to forego a full payoff. The lender(s) will review the sales price to make sure it is adequate, and ask you to submit a full financial package with hardship letter to show you are unable to keep your commitment to make the payments as agreed. Most buyers and buyer-agents are leery about getting involved in a short-sale escrow because the lenders are so slow in making a decision – you can lose buyers along the way. But as of the beginning of 2012, the banks have been more time efficient, and are approving short sales in 30-60 days.
- You can tough it out.
From the research I’ve done, the negative impact on your credit report from a short sale will be similar to that of a foreclosure – at least you’d want to be prepared for the worst, and if it turned out a little better, then you got lucky. There may come a day when the lenders ease up on those with a foreclosure or short sale in their past, but so far the length of time is seven years before you’re eligble for a new mortgage, or FHA will give you a new mortgage three years after a short sale if you had a legitimate hardship. If they determine that you did a strategic default – it’s seven years.
The federal government has eased up on the taxation of debt relief – here is a summary of the bill passed by Congress:
“Mortgage Forgiveness Debt Relief Act of 2007 – Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, (now extended) of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income.” (H.R. 1424 extended the forgiveness to the end of 2012 – extended again to 12/31/13). The State of California also now conforms with federal law, and does not tax debt relief either.
The $500,000 tax-free profit with two-out-of-five-years occupancy tax break is still in effect, but the debt relief lowers the tax basis.
What happens when the bank loses money – can they come after you for the difference? Yes – No, as of July, 2011 with the passing of SB 458, there is no recourse available to any mortgage lenders who agree to a short sale. Of course, now we’re seeing that the lenders are more reluctant to agree to approve a short sale, or they hold out for more money. But if you can complete a short sale, you will not be obligated for any additional payments to the lenders.
If you want and need to get out of the house, and can’t pay down the loan enough to be able to sell it and break-even, it boils down to this:
Either short-sell it and hope your credit doesn’t get affected as bad as a foreclosure, or
If you don’t want to bother with the hassle of selling the house and divulging your financials repeatedly, choose foreclosure.
It is worth considering the impact a foreclosure might have on your future employment opportunities, but the social stigma of either a short sale or foreclosure has greatly diminished.
As of mid-2011, it seems that the lenders have chosen to make short sales their primary focus, and slowed down the foreclosures – so they will be calling you to first offer loan modifications, then encourage you to short sell. They will also tell you that you need to be delinquent on your payments, so you can stop now. In our observations, it looks like the lenders are expediting the process, so figure that it’ll take 3-6 months to complete.
The State of California has passed two important laws, SB 931, and SB 458, that prevents lenders from pursuing a deficiency judgement. In other words, the lenders eat the loss, rather than pursue you later to collect the difference.
Here is a link to our discussion on the SB 458 bill:
Klinge Realty has a dedicated negotiator, and she has closed hundreds. Our primary concern is that our short-sellers walk away as clean as possible, and can start over again without worry.
To begin, contact Jim today:
email@example.com or (760) 434-5000 or (858) 560-7700.
FOR THE BEST LEGAL ADVICE on your short-sale options, contact attorney Rob Kovalsky at firstname.lastname@example.org or 760-634-1484 ext. 2. Rob charges $225 per hour for a full review of your loan documents, and presents your options.
The California Association of Realtors FAQ’s on short-sale deficiencies:
My article about short sales and foreclosures in Realtor Magazine: