Is A Short Sale An Option For You?

The following information is not designed to replace the advice available from a tax expert,  local attorney or CPA (certified public accountant). We recommend you consult with at least one of these professionals before listing your home for sale.

If your loans are higher than the value of your home, and are looking for help - here are your options:

1.  Quit making payments, and eventually receive a foreclosure on your property, probably in the next 5-12 months.  You'll get to live for free in the meantime, and in exchange you'll end up with a bruised credit report for the next 7-10 years.  Mortgage lenders will give you a loan 2-4 years after a foreclosure, but only if you fully qualifiy and have a decent down payment.  The foreclosure will remain on your credit report for up to 10 years and negatively impact your interest rate on all other loans. 

2.  You can hire an agent. Please be sure they are experienced in short sales! Then 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 not eager about getting involved in a short sale because the lenders are often slow in making a decision - you can lose buyers along the way.

3.  You can continue to worry.

In the meantime, call your lender and be honest in explaining your situation.  There may be relief available to you if you qualify and meet the new federal guidelines for assistance or modification of your loan.  Be prepared to document all income, debts and credit issues for further consideration.  If you have insufficient income to make continue mortgage payments, the chances are slim you can qualify to stay in your home. Call your lender and discuss your options.  It may be in your best interest to sell your home for a discounted payoff to the lender, move on,  and start over.

From the research we'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're 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 2-4 years before you're eligble for a new mortgage.

Regarding 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, 2012, 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."

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.

What happens when the bank loses money - can they come after you for the difference?  Yes, they can - they can file for a deficiency judgment if the loan was a refinance or on an investment property.  Be sure to consult an attorney or comptetent tax advisor for more information and advice.   

So far we haven't heard of any banks filing for deficiency judgments, but it could happen years after the fact.

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 isn't too badly affected as it will be with a foreclosure or ride along for the free rent and take the negative hit on your credit rating - which is at least 200 points on your FICO score. 

We have heard those with perfect credit otherwise can get their FICO score up substantially in the following 12-18 months, but underwriting guidelines which are subject to change may prevent you from getting a new mortgage for up to three years. 

Call me to discuss your situation.  We will evaluate your property to see if a short sale would be your best option. 

You can always reach me on 410 707 1409!