Short Sale Information
A: A short sale is a loss mitigation solution for sellers who owe more on their property than the current market value of the property. It's a solution that can lessen the loss to lender and yet satisfy the borrower's mortgage debt. It is the pre-foreclosure sale of a home which is completed through negotiation with the existing lender(s) in which the lender(s) agrees to accept less than the full amount owed to satisfy the debt, allowing the debt to be paid off and settled "as agreed".
For example: You can no longer afford the mortgage for whatever reason -- perhaps the interest reset because it was one of many variable-interest mortgages approved by lenders, or maybe you have to relocate to another city -- so you need to negotiate with the bank to sell the property before foreclosure occurs. You owe $300,000 on your mortgage but the current market value is only $250,000 for your property. Your agent gets a $250,000 offer and negotiates with your lender to accept this lesser amount as payment in full. This is a settlement "as agreed."
A short sale relieves you of debt and puts you on the road to regaining your peace of mind.
By the nature of the transaction, you are not going to make a profit on the short sale. You may have extracted equity from a previous refinance of the home, but your current loan balance is higher than the selling value of the home, necessitating the short sale. But the good news is that after a successful short sale you are clear of the mortgage debt and able to go on with your life with a clean slate.
Q: Why are the lenders willing to take such a discount?
A: Quite simply, it will benefit everyone. The seller is relieved of the home they cannot afford. The lender avoids a costly foreclosure and resale proceeding. The buyer purchases the home at an attractive price. The community avoids the blight of another foreclosed property. And the whole transaction brings the market and the economy one home sale closer to recovery.
Banks are not in the real estate business. They are in the money-lending business. They do not like excess inventory and bad loans on their books; therefore, if they see an opportunity to short sell the property without a huge loss, they will do it. Lenders know they could lose a lot more money if the property goes to foreclosure. There are many fees and expenses involved in foreclosing and reselling real property. It is usually in the lender's best interest to accept a reasonable short sale offer.
A: That will depend on who you choose to help you with your short sale. If you hire a lawyer or one of the many foreclosure specialty companies now cropping up to "serve" distressed homeowners, you will usually pay a hefty fee. Even more costly, you could fall prey to one of the many scam companies and so-called "investors" currently ripping off unwary homeowners who desparately need a way out of unmanagable debt.
You can save yourself this expense by hiring a real estate agent who is also a Certified Distressed Property Expert. Agents work on commission, meaning no up front money is required. In most cases, Georgia sellers pay the real estate agents' commissions. And in the case of a short sale, the bank becomes the seller, so it costs you nothing.
Since you are upside down, owing more on the property than it will sell for in the current market, you will not make any money on the sale of the property; but since the bank is now the seller, you also will not need any out of pocket money for commissions and selling expenses. Rather than costing you anything, a successful short sale will usually save both you and the bank from incurring further expenses.
The word to note here is "successful". There are many, many real estate agents who will represent a distressed seller without the training, expertise and current loss mitigation knowledge to be bring the negotiations to a successful close. Banks are currently swamped with incomplete short sale application packages that will never be approved. Get the peace of mind of knowing that your short sale will be successful by choosing a Certified Distressed Property Expert to handle it for you.
A: While a foreclsoure will forever impact your ability to get another mortgage, a short sale has a substantially lesser effect on your credit rating and borrowing power. Both will lower your credit score, but the short sale carries a lesser point penalty and a shorter duration. A short sale usually reports as a paid debt. There will likely be a reference that says "settled for less than originally owed" or something similar.
Still, it is certainly more advantageous to have the short sale referenced than to have a foreclosure on your credit report. Under the new FHA rules, you may qualify for another mortgage in as little as two years. Foreclosures, on the other hand, will usually have to be disclosed on any new loan applications in the future, and therefore will forever negatively impact your ability to get another mortgage.
A: As soon as you know you will be unable to continue paying your mortgage for whatever reason, you should consult a Certified Distressed Property Expert. When facing the spectre of foreclosure, time is your #1 enemy. Even one day can make a huge difference. When you are 30 days behind in your mortgage payments, your lender will usually consider you in default and send out a notice to that effect. According to Georgia state law and regulations, a foreclosure can proceed as quickly as 35 days from the date a notice of default is filed. For that reason, time is of the essence. The process of listing and marketing the property, finding a buyer, verifying funding, negotiating back-and-forth with the bank, and getting the transaction closed can take anywhere from several weeks to several months. But most lenders can suspend foreclsoure proceedings while you are working with them on a short sale.
Q: Will I still be liable for the difference between the short-sale selling price and what I currently owe on my mortgage?
A: Not usually. As a skilled short sale negotiator, your Certified Distressed Property Expert will get the bank's agreement to accept the short sale as payment in settlement of the entire debt, as mentioned above. The difference is "forgiven" and there is no deficiency judgement.
However, in some cases there may be tax implications. Much like the issue of credit reporting, the tax reporting is individual to the lender. As a short sale represents a loss for the lender, they can report the amount lost as debt forgiveness to the seller. If a formal tax form 1099 is filed, the seller may be responsible for paying taxes on the amount of debt forgiveness.
But you may not have to pay. President Bush signed law H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007 to help relieve borrowers from getting taxed on their losses in certain specified situations. An extension of that tax break has just been passed in the House and if passed in the Senate will insure that discharges of mortgage indebtedness via short sale on a principal residence will be excluded from a taxpayer's gross income. As always, though, certain restrictions apply. For more information on deficiency judgments and the tax liability you may face based on your current situation, submit your information to one of our analysts for a free consultation, and as always consult your attorney or tax advisor.
If you are still not sure what your next move should be, call me, Elva Branson-Lee at 678-855-5235 for a FREE consultation.