The Benefits to a Short Sale
Now why would I say there are benefits to a short sale you ask? Well the alternative to one is a foreclosure on your home. Not a choice most homeowners want or need to consider. Whereas a short sale may negatively impact
credit for about 1-2 years it is a far longer time frame with a foreclosure (about 7 years) depending upon your initial credit score in this process. So re-establishing your good credit quicker is a main benefit to a short sale transaction. The benefits to a short sale can be that you can get a FHA mortgage after 1 year of a short sale(depending upon circumstances involved with the short sale).
As of August 16, 2014 FANNIE MAE has lengthened the time from two to four years for a borrower to obtain a conventional loan with 20% down after going through a short sale. FANNIE MAE considers this a benefit since a buyer, after 4 years, can put as little then down as 5% instead of 20% to get a conventional loan. Their thought is it will be saving the short sale home buyer monies in the long run.
As the seller, a foreclosure of your home, and the lender taking it back to re-sell, will mean you will need to wait about several years before you can regain a good credit standing. A foreclosure negatively impacts your credit for a MUCH longer period of time then a short sale. Realize the impact to all your credit (revolving, credit card, car loans, insurance rates, etc.) is impacted far greater when your home is foreclosed on or a deed in lieu (turning the keys of the home back to the bank) happens.
A foreclosure or deed in lieu will impact the ability to buy another home and any borrowing you may want to do (credit card, auto loan, insurance rate, government clearance, new job). Plus the lending Bank on your foreclosed home can come after you for monies owed and not recovered through a foreclosure home sale years (always talk to an accountant and a lawyer on your risks here). You want to make sure that Uncle Sam does not come after and attach your social security payments later in life if you do not have a deficiency waiver in hand. That is another reason to do a short sale and ensure a waiver of deficiency judgment occurs when you have a knowledgeable real estate agent. There are a number of benefits of a short sale over a foreclosure, let’s talk about them.
Understand the ‘best’ short sales are the ones that are backed by private investors and not by the government. Loans that have private mortgage insurance on them or are federally backed have more ‘hands in the pot’ to recoup their monetary losses. Your lender ‘sells’ the mortgage to an investor(s) and does not keep it in their portfolio. Behind nearly all the lenders are investors (public are government and private are investor groups) on mortgage loans. Short sales have become much more streamlined in 2013 and 2014. Bank lenders have improved their processes to get a short sale home closed successfully in a 2-3 months usually.
Investors, in a short sale, have an important say in what happens with your home sale and how much of the loan they will forgive. It is the not the lender who financed your loan that has the final settlement say but the investor in most cases.
How long a short sale takes to close, how much money you must bring to the closing table as a seller (if any), whether or not the lender requires a promissory note for future payment and what the agreed upon terms are to you, the borrower, depends on the investors too. A waiver of deficiency judgment is also an important part of the negotiated short sale process. My goal is to have this on every short sale for my clients. The reason is so the banks can not come back after the short sale for the ‘shortfall’ of monies between sale price on the home and what was owed on the mortgage to the seller.
UPDATE as of January 2015: Also, you may qualify for a HAFA short sale. A Home Affordable Foreclosure Alternative program when you participate will forgive the mortgage deficiency owed but you must have a Fannie Mae, Freddie Mac or one of 100 mortgage servicers to participate. When you participate with a HAFA program, the servicer forgives the outstanding debt of mortgage owed. UPDATE: The HAFA Program has ended as of December 31, 2016.
Know that the final bank short sale approval letter is your ‘brass ring’ to a less financially burdensome future when negotiated right by your North Kingstown short sale agents. Talk to me at 401.529.7849 regarding this process today.
Infographic courtesy of Tim Lucas with permission at: http://mymortgageinsider.com/ask-tim/buying-house-after-foreclosure . As of January 2014.
It is important to talk with a real estate professional about this short sale process and not wait when you are behind on your mortgage. Be pro-active and call me now to see how I might help you through this process. It does not cost you anything to put your home on the market as a short sale. The lending institution will put closing costs and real estate commissions as part of the mortgage forgiveness amount when I settle a short sale for you. Don’t delay. Call me today at 401.529.7849 to discuss your situation.
UPDATE: The Mortgage Forgiveness Act ended in 2014 and never extended by Congress for forgiveness of monies from a short sale as ‘taxable income’. Talk to your accountant or CPA today on how it may impact your situation. Always talk to your accountant for your financial direction here. The Mortgage Forgiveness Act is no longer in effect from 2014 on so dealing with a tax advisor/accountant is a must before you file your federal income taxes.
The following is an update as of June 2014 courtesy of my California Associate, Melissa Zavala, who has been on the forefront of short sales :
What follows in information courtesy of the California Association of Realtors®:
In their new April 29, 2014 letter, the IRS states that in order for a debt to be non-recourse at the time of the short sale, the original debt must be used to purchase or build a 1-4 principal residence or a refinance of such debt. As in the prior letter the IRS affirms that a lender’s forgiveness of such debt in a short sale will not result in COD (cancellation of debt) income, but instead will be treated as capital gains. And as before, single or joint tax filers selling a principal residence can use the appropriate $250,000 or $500,000 capital gains exclusion.
What changed is that a loan used to substantially improve the taxpayer’s principal residence may now be treated as COD income instead of capital gains. Additionally, the IRS clarified that an investor’s short sale debt will also be characterized by the nature of the debt at inception. If it was recourse debt (non principal residence purchase) originally, it will remain recourse debt at the time of the short sale. This may be somewhat good news for investors who may prefer to have short sale debt treated as COD income rather than capital gains. COD income may be avoided under a claim of insolvency where capital gains cannot. Again talk to your tax advisor for the most current short sale tax information.
Pick up the phone and call me today at 401-529-7849 or email me at Ginny@RiHouseHunt.com. Let’s have a confidential conversation about your financial situation with your home and what a short sale will do for you.
The Benefits to a Short Sale are many so do not let your home go into foreclosure. Benefits to a Short Sale.
Ginny Lacey Gorman is a member of short sale superstars and a licensed top selling RI coastal real estate agent. Visit my RI Real Estate web site to learn more about the short sale process. My team and I work hard for our clients in making the short sale happen successfully. My team can help you through the short sale process. If you are under water on your mortgage( owe more on your home than it is worth) or will be shortly, please call me to find out your options at 401-529-7849 or email me at ginny@RiHouseHunt.com. It will be a confidential call.