Short Sales
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:
- 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. Mortgage lenders will give you a loan 3-4 years after a foreclosure, but only if you fully qualifiy and have a decent down payment.
- 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.
- 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 three years if you have extenuating circumstances (click link at bottom of page).
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)
The last line means that the $500,000, two-out-of-five-years occupancy tax break is still in effect, but the debt relief lowers the tax basis. The State of California still taxes you on the debt relief, just like regular income.
What happens when the bank loses money – can they come after you for the difference? Yes – especially through a short sale, and the latest SS approvals we’ve seen include verbiage about the bank still having the right to pursue a deficiency judgement against you. The HAFA program that begins April 5, 2010 will prevent any possibility of a deficiency judgement, but not every short sale qualifies for HAFA.
In summary, 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 (no promises here) or milk it for the free rent and take the negative hit on your credit rating – which is at least 200 points on your FICO score.
I have heard those with perfect credit otherwise can get their FICO score up substantially in the following 12-18 months, but underwriting guidelines will prevent you from getting a new mortgage for three years.
FOR THE BEST LEGAL ADVICE ON YOUR SHORT-SALE OPTIONS, CONTACT ATTORNEY ROB KOVALSKY at kovalsky@sbcglobal.net or 760-634-1484 ext. 2. Rob charges $225 for a full review of your loan documents, and presents your options.
Here’s a link to the latest on when you can obtain a mortgage after a foreclosure or short sale:
