1. Is a Short Sale right for everyone?
NO! There are consequences to your credit as well potential tax consequences when you short sale a property. We advise ALL of our clients to speak with an attorney or legal council as well as a CPA or tax advisor to see what the best choice is for them.
The bottom line is that once you stop making your mortgage payment, you have made a choice that WILL have a negative affect on your credit.
A short sale is an option to foreclosure or bankruptcy. Other options include:
· Do Nothing
· Loan Modification - A modification to an existing loan made by a lender in response to a borrower's long-term inability to repay the loan. Loan modifications typically involve a reduction in the interest rate on the loan, an extension of the length of the term of the loan, a different type of loan or any combination of the three. A lender might be open to modifying a loan because the cost of doing so is less than the cost of default. (www.investopedia.com)
· Deed in Lieu of Foreclosure - A potential option taken by a mortgagor (a borrower) to avoid foreclosure under which the mortgagor deeds the collateral property (the home) back to the mortgagee (the lender) in exchange for the release of all obligations under the mortgage. Both sides must enter into the agreement voluntarily and in good faith. (www.investopedia.com)
· Short-Refinance - The refinancing of a mortgage by a lender for a borrower currently in default on his or her payments. This is done to avoid foreclosure. Typically, the new loan amount is less than the existing outstanding loan amount and the difference is typically forgiven by the lender. A lender might do this because it is more cost effective than foreclosure proceedings. (www.investopedia.com)
· Reinstatement – pay the entire default amount plus interest, attorney and late fees
· Forbearance - A postponement of loan payments, granted by a lender or creditor, for a temporary period of time. This is done to give the borrower time to make up for overdue payments. (www.investopedia.com)
· Bankruptcy
o Chapter 7 – Completely settle personal debt. The chapter of the Bankruptcy Code providing for "liquidation," ( i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.) (www.uscourts.gov)
o Chapter 13 - The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.) (www.uscourts.gov)
o Chapter 11 - A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11. (www.uscourts.gov)
2. Are there credit benefits to doing a short-sale vs. a foreclosure?
The truth is that there are so many ambiguous statements regarding whether or not a foreclosure is actually better than a short-sale as far as future credit goes.
The truth is that if you have a late mortgage payment, it WILL have a negative affect on your credit score. However, many lenders will require the borrower to have suffered late payments before they will even consider approving a short sale.
Some lenders have stated that they will view a foreclosure the same as a short sale on future credit applications.
Fannie Mae and Freddie Mac have posted statements indicating that a person who sold a house as a short sale can get a loan to purchase a home in as little as 3 years after the short sale. They have also stated that they will not loan to a person with a foreclosure on their credit for 7 years.
A strategy that some borrowers have used is to ask the lender, as a condition of the short sale, to report the loan as "settled in full". You have about a 10% chance of them agreeing to this, but it is worth asking. You may even be able to get the lender to remove the late pays, but this is even a bigger long shot.
A short sale may not show as a derogatory mark on your credit because credit bureaus do not show the words "short sale" on your credit report. They usually state "paid as agreed" or "paid less than agreed" or some other type of wording that may be interpreted by persons reading your credit report as “short sale”. The actual affect on the FICO score can be a drop from as few as 50 points or upwards of 150 points, mainly due to the number of late payments recorded during the short sale. All lenders report short sales differently.
As for how a foreclosure affects your credit - a number of sources have reported FICO score drops from 200 to 400 points after a foreclosure. Generally this credit score remains on your credit report as a public record for up to 10 years. It is also important to note that some employers run credit checks for employment purposes. It is a possibility that a future job application may be denied if there is a foreclosure on the record.
3. Are there TAX consequences of doing a short sale vs. foreclosure?
Every situation is different for each person, so it is important to consult with a tax professional, CPA, tax attorney or someone who is qualified to make this determination for you. But here is some information to get you started, after which you should confer with a CPA to see if any of this applies to you. When you do a short sale or a foreclosure the lender is allowed to write off the loss and pass it on to you as income in the form of a 1099-C. The IRS considers this income for you and is taxable. For example, you borrowed $200,000 to purchase a home, but only were able to repay $150,000 in the short sale, you will receive a 1099-C for that $50,000 and possibly taxed on that according to your tax bracket.
Federal Taxes: The Home Mortgage Forgiveness Debt Relief Act of 2007 states if the property is your primary residence and the debt discharged was from your original “purchase money” loan, then you will not have to pay the taxes for that amount. Also, if you refinanced the property and took equity out of the property to only improve your home, then you may still be eligible for exclusion of the taxes. This act has been extended until the end of 2012. Find up to date information on this exemption and other rules at the IRS website www.irs.gov.
If your property IS NOT your primary residence OR if you refinanced your home and used the money out of the property for other expenses, then it is possible that you may have to pay the taxes unless you are eligible for a capital loss deduction or “insolvency.”
The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent. Insolvency means your debts (including your mortgage) exceed the value of all your assets. In other words, if, at the time of the short sale, your debt is greater than your assets, then you are insolvent. Ask your tax advisor if you are eligible for the Debt Relief Act qualifications or are eligible for “insolvency” and filing the IRS Form 982.
It is important to understand tax implications can apply whether you do a short sale, deed in lieu or a foreclosure.
4. Can My Lender Come After Me For the Difference?
There are two types of loans in NV, non-recourse and recourse. A non-recourse loan is one you obtained to initially purchase your primary or main residence. If you go through a non-judicial foreclosure process with a non-recourse loan the bank will not come after you for the difference. If you do a short sale with a non-recourse loan, some attorneys feel you should be protected and not have to worry about the bank coming after you. Other attorneys feel that the does not address the short sale issue and does not protect “non-recourse” loans, only a foreclosure does. The bottom line is there is no precedent set in court and no lender has challenged it that I know of, yet. It is important to have an attorney explain to you the CA Civil Code of Procedures 580b, 580 d, and 726, as we cannot give legal advice.
If you have done any type of refinancing or obtained any cash out financing or have a Home Equity Line of Credit taken out after the date of purchase, then these are considered “recourse” loans and the ability is there for a bank to come after you for the difference if you go through a short sale. Unless you receive a short sale approval letter specifically stating that they will not pursue a deficiency judgment or some other verbiage of that sort. Every lender issues a completely different approval letter with different verbiage, so it is important to review you approval letter when it is issued, and we have attorneys on retainer to help you review your approval letter so that you full understand whether the verbiage and whether or not the lender will come after you. It is also our goal to always get you a full release from any liability from your bank when obtaining a short sale approval, and we have an excellent success rate of approval letters.
The ultimate goal of a short sale however is to get a full release in an approval letter which will absolve you from having to pay back any deficiency.
Here is the law that addresses Deficiency Judgments:
NRS 40.455 Deficiency judgment: Award to judgment creditor or beneficiary of deed of trust.
1. Upon application of the judgment creditor or the beneficiary of the deed of trust within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080, respectively, and after the required hearing, the court shall award a deficiency judgment to the judgment creditor or the beneficiary of the deed of trust if it appears from the sheriff’s return or the recital of consideration in the trustee’s deed that there is a deficiency of the proceeds of the sale and a balance remaining due to the judgment creditor or the beneficiary of the deed of trust, respectively.
2. If the indebtedness is secured by more than one parcel of real property, more than one interest in the real property or more than one mortgage or deed of trust, the 6-month period begins to run after the date of the foreclosure sale or trustee’s sale of the last parcel or other interest in the real property securing the indebtedness, but in no event may the application be filed more than 2 years after the initial foreclosure sale or trustee’s sale.
(Added to NRS by 1969, 573; A 1979, 450; 1985, 371; 1987, 1345)
Nevada is a deficiency judgment state, which means a seller can be sued by the lender after they have been foreclosed upon. A second can pursue a foreclosed owner for up to six years. By negotiating a short sale, instead of foreclosure, the one-action rule and the deficiency protections are no longer applicable. The Seller in a short sale will most likely have a tax consequence. Sellers in a short sale may also be sued by the lender for breach of non-payment of a contractual obligation. The statute of limitations in Nevada for breach of contract is six (6) years.
Changes to the law were put into effect October 1, 2009. Here is an article addressing that:
NV Law Change October 1 Restricts Deficiency Judgments on Foreclosed Homes
Robert Noggle, attorney with Black Lobello law firm, explains the new Nevada Deficiency Law that takes effect on October 1, 2009 in this guest contributor post.
“Nevada currently provides for the right of a foreclosing lender on real estate to pursue a deficiency judgment against the borrower on any type of property including a primary residence. Nevada is known as a full recourse state. The law provides for a six month period following the trustee’s sale in which the lender may file an action against the borrower to recover amounts owing.
Effective October 1, 2009, Nevada becomes a limited recourse state similar to California. Loans made after October 1, 2009; by a financial institution to a borrower who continuously occupies the property as a primary residence are non-recourse. This means that the lender may not pursue a foreclosed borrower to recover a deficiency. Although some may consider this the equivalent of sending life boats and vests to the Titanic days after the sinking, it is a significant development in Nevada real estate law.
For the new law to apply the following requirements must be met:
- The real property is a single-family residence;
- The loan was used to buy the property;
- The borrower continuously occupied the property as a principal residence after the loan was made;
- The original loan was not refinanced;
- The loan was made by a financial institution.
5. Why Would I Do a Short Sale if I Could Not Get an Approval Letter Removing the Deficiency Balance?
If you are worried about a lender coming after you or your financial future, you may not want to. But some home owners are willing to accept an approval letter without a deficiency removal for the following reasons:
§ To stop the payoff clock and stop incurring future or larger deficiency, or payoff.
§ To avoid a foreclosure on their credit.
§ To settle the deficiency issue at a later date.
§ To try and do the most responsible thing and get the bank the highest price possible for the home.
§ To avoid any attorneys or additional fees out of pocket to dispose of the home.
§ They simply will take their chances and file for Bankruptcy if the lender does try to collect.
§ They simply will take their chances that the lender will not come to collect and “write off” the loss instead.
While any or none of these reasons may apply to you, it is important to understand every home owner has different levels of comfort and risk tolerance, personal goals, and opinion on the matter. You will always have the chance to review your approval letter with an attorney before selling your home and you can cancel your listing at any time prior to entering into an escrow with a buyer without any fees paid to us.
6. What is the Difference Between a 2nd Mortgage and a Home Equity Line of Credit (HELOC)?
A true second mortgage is one that is usually used to typically purchase the home and used as additional financing – maybe you have heard of it as an “80/20” loan or something like that when you originally purchased the home. While some seconds are not always used at purchase, in either event they are loans that are only secured by the property and may be wiped out if a first forecloses and there is not enough equity to pay them anything.
A HELOC is completely different in that, while it does include a lien on a property, it is still a line a credit that can stay open even if the lien is wiped out in a foreclosure.
7. Can I do Short Sale with a Home Equity Line of Credit (HELOC) as a 2nd Mortgage?
Yes, you can still do a short sale if you have a 2nd that is aHELOC, however it can be more difficult depending on your lender. It is important to understand that HELOCS are a completely different type of loan, and the lender can allow you to do the short sale and release the lien on the property, but still leave the entire account open and thus you still owing the entire balance due. HELOCs are like credit cards with a lien on a property. If the lien is released from the property, it doesn’t always mean the line of credit is closed. MANY inexperienced short agents do not understand this. A new trend that is happening as well is that the bank can sell the bad HELOC loan on the secondary “debt collection” market for a higher price (10%-20% of note value) than what the lender in first position is willing to pay (1%-3% of loan value). Because of this many HELOC lenders have become extremely more aggressive in requiring a 10%-30% payout from borrowers to allow a borrower full release from these loans. However, we have seen that the average for the release of this lien is between 10-20% of the total loan balance.
If the HELOC lender wants a 10%-30% payout to allow a short sale with FULL RELEASE OF LIEN AND NO DEFICIENCY and the first is not willing to pay that amount and/or other remedies cannot be found, it is possible that you as the borrower can cover the difference by either paying cash at the closing and/or signing a promissory note under certain terms.
After a consultation we will be able to talk to you about your goals and likely scenario outcome. You will not be obligated to commit to anything until you understand the terms the lender is requiring. If you do not agree to what you lender requires then you can cancel your listing at anytime without any fees paid and not go through with the short sale!
8. Will the Short Sale cost me anything?
You pay ZERO for our listing and short sale negotiation services. Our fees for negotiating your short sale and getting your home sold will be by the 1st lienholder as part of the short sale agreement. We typically can negotiate to have the lender pay for all the costs associated with selling the home, up to and including Transfer Tax, HOA Transfer Fee, escrow/title fees, and even help with buyer closing costs. In some instances, we have also been able to negotiate past due property taxes and HOA dues as well as repairs necessary to the sale of the property. However, we require our sellers to keep the HOA, sewer, taxes and utilities bills current so that we can have a successful closing free of additional liens on the property. Each situation is completely dependent on the lender you have, the investor (real owner of the note) and your personal scenario.
9. Do I Qualify for a Short Sale?
In order to be eligible for a short sale and have us represent you we must first be able to prove to the lender that you are a victim of a “hardship” and therefore unable to continue making payments on your mortgage. A hardship situation is one that is the result of some extenuating circumstance that forces the borrower into a position where they can no longer afford their mortgage payments. While every situation is different, some frequent examples of hardship include:
§ Unemployment or loss of primary income source
§ Inability to work due to health crisis
§ Mounting medical expenses
§ Employment relocation
§ Failure of business
§ Bankruptcy
§ Death of spouse or significant other
§ Divorce or separation
§ Incarceration
It is best though to get a free consultation to see if you would qualify.
10. Do I Have to Stop Making Payments on My Mortgage in order to do a Short Sale?
Not Always. Just because you called you particular lender and they told you that you could not do a short sale unless you miss some payments, don’t believe it to be true. These people who answer the phones at these mortgage companies are customer service personnel who do not care know about the particulars of your loan or your situation. Their primary task is to assess the phone call and get you to make a payment. Every borrowers situation is different and in some cases, a short sale can be done while staying current on your mortgage payments. However, we are seeing more and more investors (owners of loans) deny short sale requests, due to the fact that there have not been any missed payments. Normally you have to miss at least 2 payments for them to seriously consider a short sale. The important thing to note is that if you are able to afford your payments, you should continue making them until we devise a plan for you based on your goals and objectives. Many times in short sales you need to gather futher information from the lenders to determine what they want and are willing to do, before voluntarily missing any payments. If you have a true hardship and simply cannot afford your payments, then there is no need to worry. Be sure to call for a consultation before you decide to miss any payments if you don’t have to.
11. Should I File For Bankruptcy?
At this point in the market there are many attorneys who are advising clients to file bankruptcy in any situation and charging very high fees. For some this may be the correct solution. However it is important to understand that going through a bankruptcy, which ever kind you choose (Chapter 7 or Chapter 13), will not allow you to keep your home unless you bring your mortgage current. While you may be able to stay in your home while the bankruptcy is taking place (could take 6-10 months), it also “freezes” the home from being able to be sold or do a short sale. You should speak with a competent bankruptcy attorney and decide if you want to sell your home before filing or when the filing is completed. We are not lawyers and we do not provide legal advice.
12. When should I begin the short sale process?
Immediately, foreclosure and short sale situations tend to be extremely time sensitive and consuming for negotiations. The sooner we can begin the negotiations with your lender, the greater the chances of a successful resolution. There is no need to wait until the lender sends you a notice of default or initiates formal foreclosure proceedings against you. Time is of the essence! Please contact us today 702-388-9924 for a free consultation with our short sale specialists.
13. How Long Does a Short Sale Take?
This depends on many different factors, such as who your lender is, how long it takes to get an offer, how many loans you have, if you are behind on payments, and the list goes on. With an inexperienced agent it could take 6-8 months, with our system, and contacts with each lender we have an average turnaround time of 4 months. Our fastest record of getting a home on the market and an approval is 21 days, but that is not the case for everyone. Each scenario is different. The average is normally 4-6 months from the time we have the property listed to the closing date.
14. How Do You Handle Short Sales? Do You Hire Other 3rd Party Negotiators?
If you are participating in the Program 3648 with our company, we will use BSG as the negotiating company, otherwise, we process all short sales in-house. We have professional, experienced short sale agents and full-time processors that will manage your file from start to finish. You will have one point of contact that will handle the listing of your home, answer all calls from buyers and agents, and the processor will be the one who calls your bank as often as required and handles the negotiations from start to finish. Every interested party on your home WILL GET a call back from someone who knows the exact status of what is going on with your file.
Keeping everything in house has provided us with 97% success rate, and we find that we have been doing this much longer than some of the 3rd party vendors out there.
For your FREE Consultation, please give us a call at (702) 388-9924.
Start putting your mind at ease today let us help you move forward today!