This is a general overview of the
benefits and drawbacks of going through a foreclosure vs. a short sale. I am
neither a lawyer nor a tax consultant, you owe it to yourself to consult one to
know what the effects of a foreclosure or short sale will be for you personally.
If, after you review this information, you think selling your home via a short sale may be an option, call or email me. I will answer your questions and give you a complete overview of the process so you can make the best decision for your situation.
Benefits
for Foreclosure
Although going through foreclosure can be painful and embarrassing, there are
benefits:
- No
mortgage payments to make.
- Foreclosure
proceedings take months to conclude.
- The
home is still yours until the foreclosure is final.
- No
strangers are traipsing through your home.
- Banks sometimes give cash for keys after the public sale.
Drawbacks
to Foreclosure
Few people really want to experience a foreclosure. Memories are made in a home,
and losing it can shatter future dreams.:
- The
right of home ownership is striped away.
- Homeowners
return to the rental market as a renter.
- The
bank may post a Notice of Public Sale on your front door.
- Your
credit takes a nose dive, and a foreclosure will remain on your credit
report for 10 years.
- Under
Fannie Mae guidelines, without extenuating circumstances, you will not be
eligible to buy another home for 5 years.
Benefits
for Short Sale
What do you get out of a short sale?
- Retain
some dignity in knowing that you sold your home.
- You
won't suffer the social stigma of the "F" word: foreclosure.
- No
mortgage payments to make, unless you choose to make them.
- You
can meet the new owners.
- You
will be eligible, under Fannie Mae guidelines, to buy another home in 2
years instead of 5 years.
Drawbacks
to a Short Sale
You may experience some of the same drawbacks as a foreclosure, but they
might seem less intense:
- Waiting
for the bank to respond to an offer is frustrating.
- The
bank will want to examine personal records such as tax returns, bank
accounts, assets and liabilities, in addition to asking for a hardship
letter from you.
- Accommodating
buyers will mean keeping your home in spotless condition for weeks or months
until an offer is received and putting up with traffic through your home.
- There
is no assurance the bank will accept a short sale offer.
- The
derogatory credit will remain on your credit report up to 7 years.
- For many sellers, though, the chance to buy another home in two years is the real motivation to do a short sale. Good credit behavior can supplant bad credit after two years, even though the derogatory will remain.
How
is Your Credit Affected?
Foreclosure
or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit
the same. Sellers will take a hit of 200 to 300 points, depending on overall
condition of credit. This means if a seller's FICO score before foreclosure was
680, it could dip as low as 380.
Short
Sale
The effect of a short sale (providing
the sellers are more than 60 days late) on a seller's credit report is a bit
unclear to me at this time. From what I can find out, the ding on credit will show up as a pre-foreclosure
in redemption status, which will result in a loss of approximately 200. This is
not set in stone and we are still finding out how short sales will be reported
and will ultimately affect credit scores.
Waiting
Period Before Buying Another Home
Generally a seller who wants to buy
another home after foreclosure will end up waiting about 3 to 7 years before
a lender will offer any kind of interest rate that makes sense.
Buying After a Foreclosure: The waiting period is 5 years up to 7
years.
Buying After a Foreclosure With Extenuating Circumstances: The waiting
period is 3 years up to 7 years.
What are documented extenuating circumstances?
Fannie Mae allows for extenuating circumstances such as:
Death (not yours, of course)
Illness
Job Transfer
Accident Resulting in Severe Injury
Generally, extenuating circumstances are things that happen beyond your control,
which dramatically affect your ability to continue making payments on your
mortgage. With documented extenuating circumstances, the waiting period is less
than without. Being unable to afford an increase in payment due to an interest
rate increase on an adjustable-rate mortgage is not considered a circumstance
beyond your control.
Buying After a Deed-in-Lieu of Foreclosure: The waiting period is 4 years
up to 7 years.
Buying After a Deed-in-Lieu of Foreclosure with Extenuating Circumstances: The
waiting period is 3 years up to 7 years.
Short
Sale
New Fannie Mae guidelines now require
only 24 months' seasoning, at which time the short sale seller can apply for a
new loan at a reasonable interest rate.
Short
Sale / Foreclosure Deficiency Judgments
The bad news is you could be subject to
a deficiency judgment for the difference between the loan amount and the amount
paid. In general, a trustee's sale wipes out the right to a deficiency, except
for certain junior lien holder conditions. In California, purchase money loans are not subject to
deficiency judgments; however, some hard money loans, equity loans and
refinances are, providing certain conditions apply.
The lender has sole discretion whether to
pursue a deficiency judgment in those instances when the judgment is permitted.
To determine whether a pending foreclosure or short sale is subject to a
deficiency judgment, talk to a real estate lawyer.
Short Sale and the
IRS
Your lender will issue a 1099 statement charging you with
taxable income on the difference between the amount you owed and the net sale
price that the lender was able to receive for your home. Normally, debt that is
forgiven in a short sale is required to be reported as taxable income on your
tax return. Historically, short sellers were required to pay income taxes on
every dollar forgiven by the mortgage lenders. However, under the Emergency
Economic Stabilization Act of 2008, if you short sell your principal residence
between 2006 and 2012, you will not be taxed on the debt forgiven by your
lender.
The lender issues the 1099 to be able to write off the amount they cancelled on their taxes. You still must report the amount of debt forgiven, or cancelled on Form 982 with your federal tax return. The IRS will not charge you any income tax on the cancelled debt, just make sure to do your bookkeeping and file the appropriate forms.
Again I encourage you to seek legal and tax
advice before making that decision.
call me directly at 760.476.9560 or
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