Do you have a client walking the fine line between foreclosure and a short sale? They may have several questions regarding their predicament that you might not know the best way to answer. The good news is that’s what we are here for! We have compiled a few key points that should be made to a wavering client regarding their decision to short sale or not.
First, let’s start with the definition of a short sale:
In simple terms, a short sale is a graceful exit from an underwater mortgage. The lender will agree to sell the home for less than what is owed on the mortgage.
Secondly, what are the perceived advantages of a short sale?
- Credit - If a homeowner decides to short sale instead of foreclose, they can become a homeowner again far quicker. In fact, updated Fannie Mae guidelines assist homeowners in qualifying for loans just 2 years after their short sale. If a foreclosure is on record, it could take as long as 7 years to purchase again.
- Short sellers could obtain additional time in the property - During a short sale, the homeowner could have more time to plan for what’s to come. Since the average short sale takes between 60-90 days, there isn’t a rush to immediately find a new residence. With a foreclosure, you could have as little as 30 days.
- Short Sale Cash at closing / Relocation Assistance – There are many updated government short sale programs available and designed to assist the homeowner in need. Bank of America has recently begun to offer pre-approved homeowners up to $30,000 in assistance. We’ve also had Chase and CITI offer homeowners $12,000 - $30,000 as a cash incentive to the homeowner short selling their property. There is also the HAFA (Home Affordable Foreclosure Alternatives) program that is there to assist qualified homeowners with a relocation assistance of up to $3,000.
- Mortgage Debt Forgiveness Act– There is the Debt Forgiveness Act of 2007 which may forgive the homeowners of paying the taxes associated with the cancelled debt of selling the property short. This is a question for a Certified Public Accountant. Click here to see the Mortgage Debt Relief Act of 2007 as described by the Internal Revenue Service (IRS)
Lastly, what could be the perceived disadvantages of a short sale?
- Credit - If a homeowner decides to take the route of a short sale, their credit score may be impacted due to the late mortgage payments and/or the reporting of the account being paid in less than full. However, it typically won’t be impacted nearly as much as a foreclosure.
- Mortgage Debt Tax Liability – The seller may be responsible for additional taxes if they choose to short sell. If the lender agrees to the short sale, there may be a liability to pay taxes on the debt forgiven. It is important to speak with a tax attorney or professional regarding this matter.
- Deficiency Judgments - In some states, the lender may be able to come after the homeowner for the deficiency amount. In the state of California, for instance, there are Senate Bills that protect California homeowners who decide to short sale their property. (Senate Bill 931 and Senate Bill 458). Again, it is important to speak with a tax attorney or professional regarding this matter.
At Short Sale Experts INC, we can answer these questions (minus the specific legal or tax questions) plus many more! We are here to help – our name says it all!
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