Questions

Questions on Foreclosure and Short Sales

1.      What is the difference between a short sale and a foreclosure?

Foreclosure is a situation in which a homeowner is unable to make mortgage payments as required, which allows the lender to seize the property, evict the homeowner and sell the home, as stipulated in the mortgage contract.

Short sale is a term used to describe a home transaction in which the sale price of a property will not be enough to pay off the existing mortgage(s), and where the lender(s) agrees to accept less than the full payoff amount.

2.      What Happens after a Foreclosure?

After a foreclosure, the road to recovery an be challenging, but there are steps you can take to get yourself and your family moving forward to new housing, revitalizing your credit, and buying another home in the future.

3.      When should I communicate with my lender?

If you cannot make your mortgage payments and are worried about missing a payment, you should call your lender right away and discuss your financial difficulties.  This gives them the opportunity to work with you to create a plan.  Do not stop paying your bills, and do not wait until you cannot make payments before you act.  Though you may feel scared or embarrassed, immediately begin working with your lender to avoid foreclosure on your home. You should also contact a HUD-approved housing counseling agency to get free, expert assistance on avoiding foreclosure.  (www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm)  

4.      What is a short sale negotiator?

A short negotiator is some who provides assistance in negotiating with the lender on a seller’s behalf.  The goal is to convince the lender to accept less than the debt amount on the mortgages(s).  There are currently several variations of the term “short sale negotiator.”  These are just a few of the terms which exist and are not inclusive: “debt negotiator”, “debt resolution experts”, “loss mitigation practitioners”, “foreclosure rescue negotiators”, “short sale processors”, “short sale coordinators” and “short sale expeditors.”

5.  Can a Realtor® act as a short sale negotiator within the state of California?

Yes, in order to negotiate a short sale in the state of California, a person must be a licensed real estate agent, or an attorney licensed to practice law in California. Personally, I believe every short sale seller can benefit from a legal consultation prior to putting a home on the market as a short sale. I suggest to all of my clients that they obtain legal advice. Especially if I spot red flags that could come back to bite them. While the government HAFA short sale program offers some protections for sellers, it doesn't take the place of obtaining legal advice. Also, some states require that a lawyer handle the short sale. California is not one of those states. In California, generally licensed real estate agents handle short sales.

6.  Is a short sale right for you and what are the tax consequences?

First, understand that a short sale may not discharge the debt.  You should know whether you will still owe your lender money (a deficiency) after the short sale and BEFORE you close the sale of your home.  Even if a lender agrees to a short sale, the lender and any junior lien holders may not agree to forgive the debt entirely and may require you to pay the difference as a personal obligation.  Both a short sale and a foreclosure can result in taxation, either in the form of capital gains or as cancellation of debt income. A taxable capital gain can occur where the amount of the short sale (or the fair market value in a foreclosure) exceeds your basis in the property (the purchase price plus any improvements in your home). Additionally, in any situation where the lender is not able to collect the outstanding balance of the mortgage (whether voluntarily or by law), you could have taxable cancellation of debt income. When a lender cancels any portion of recourse debt, they will issue a 1099-C. The IRS views canceled recourse debt to be INCOME to you (you received money at some point and no longer have the obligation to pay it back). This is known as “Phantom Income” because you do not actually receive any money at the time you suffer the obligation to pay taxes, but you must report it as ordinary income on your tax return. There are exemptions to taxation resulting from a capital gain or cancellation of debt income. Some examples include the principal residence exemption to capital gains, the Mortgage Forgiveness Debt Relief Act of 2007 and IRC 108 insolvency and it is always a good idea to speak with an attorney or tax consultant for more information to see if you qualify.  A real estate agent is not qualified to give advice on taxation.

Consider taking the following actions if you decide to pursue a short sale.

·         Short Sale Realtor®

Interview several Realtors® and ask about their experience in short sales, the number of short sale transactions they have handled, their education and training.

·         Documentation and Eligibility Investigation

The documentation and eligibility criteria for short sales vary depending on the lender and investor guidelines.  Generally, you must prove that you are financially incapable of paying the loan.  The lender will consider this when determining the costs of accepting the short sale versus foreclosing.  You will have to document your financial situation and if you have funds to pay the short sale deficiency, a lender may not allow a short sale.  However, some lenders will not require you to dip into retirement accounts to fund the deficiency.  These issues will have to be negotiated with the lender.

·         Determine the Amount Owed on the Property

All of the debts and costs must be factored in before a lender can determine whether a short sale is more economical for them.  The analysis will include the delinquent loan, all other recorded debt (past due homeowner’s association fees, unpaid property taxes), and the costs of a sale (closing costs, brokerage commissions and necessary repairs). If you have more than one loan on the property, a short sale will require the approval of all lenders.

·         Determine Estimated Fair Market Value of the Property

You must prove to the lender that the home is worth less than the unpaid loan balance plus closing costs.  Your Realtor® or an appraiser will be able to assist in estimating the value of the property.

·         Consult Legal Counsel

Counsel can help you determine whether a short sale is the best option and can advise you during the short sale process.  Having a Realtor® educated in the short sale process alongside an attorney is also very helpful.

·         Be Aware of the Impact on Your Credit Score

The impact of a short sale on your credit score depends upon a variety of factors, including late or missed payments.  A short sale may appear on your credit report as “pre-foreclosure redemption,” “paid in full for less than full balance” or other similar terms.  It is possible that a short sale will have a different impact on your credit than a foreclosure or deed in lieu of foreclosure (or any other outcome). But be ware that once you miss mortgage payments, your credit scores will be severely impacted.  Some lenders will tell you that they will not consider you as a short sale candidate unless you are behind on payments.  Do not intentionally withhold mortgage payments, solely for short sale consideration, without first consulting legal counsel.

·         There May Be a Waiting Period Before You Can Buy a Another Home

Your ability to qualify for a loan to purchase another home after a short sale will likely be impacted because of the impact on your credit score.  It may be some time before a lender will loan you the money to purchase another property.

·         What Happens After a Foreclosure

The road to recovery after foreclosure may be challenging.  But there are steps you can take to hep get you and your family to move forward, find new house, work on restoring your credit and begin planning to buy another home in the future.

Contact the U.S. Department of Housing and Urban Development’s Office of Housing Counseling.  Local HUD-approved counselors can help work through your options for housing.

https://www.hud.gov/topics/avoiding_foreclosure 

Moving forward financially and emotionally is going to take some time.