STILL dealing with the burden of owning a house that is underwater at this stage of the late stage mortgage meltdown we had has got to be much more frustrating than ever. It’s almost like you are the only once left hanging by a string and everyone else has escape tragedy or has gotten bailed out. But this situation has to be dealt with and has to be solved quickly. I am sure you hear the news and it’s all over the radio and TV waves that the economy has been recovering steadily. You probably noticed a lot more activities at the malls, weekend restaurants packed with people waiting in lines, more families taking trips on long holiday, a recent obvious signs of recovery is during this past 4th of July holiday, the night skies where lit with fireworks for hours. This only means most consumers have excess money to spend for leisure, food, and entertainment and soon to be buying homes and home furnishings. A fact that I observed is the traffic in La and Orange County has gotten worse in the past years, again that only means more commerce, which is a good sign. I remember being on the freeway sometime in 2008 on a rush hour weekday where you hardly see any trailer trucks and traffic; you will wonder where is everyone?
One solution some struggling homeowners turn to in hopes of limiting the financial damage is a short sale. In real estate, that term has a different meaning than the stock transaction in which an investor seeks to profit from a drop in price. A real-estate short sale entails selling the home at a loss under an agreement with the lender. The Making Home Affordable program has been offering lenders and loan servicers an incentive of up to $1,000 for each completed short sale and up to $1,000 more to share the cost of paying any second-mortgage lenders to release their claim on the property. Homeowners also benefit: They can get up to $3,000 for relocation expenses.
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Here’s what you should know about short sales before taking the leap.
1. Your credit score will tank just the same.
A short sale can have the same devastating impact on a credit score as a foreclosure. “If someone is unable to repay their mortgage, regardless of how that turns out, that failure to repay the mortgage is highly predictive of future risk,” says Craig Watts, a spokesman for Fair Isaac, the company that calculates the FICO score, the score most commonly used by lenders.
The difference is when you do a Short Sale you will have the opportunity to reestablish your credit and buy another house in 3 years or sooner. When you have a foreclosure, sometimes the debt balance due to the foreclosure will remain in your credit for 7 years.
2. The lender may come after you for the difference. Depending on the state you live in, you may have more protections from your lender with a foreclosure than with a short sale.
This is particularly true in states that ban deficiency judgments in foreclosure, like California. Deficiency judgments empower lenders to sue borrowers if the home they lost in foreclosure is sold for less than what they owed. For now till the end of the year, homeowners doing a short sale have to be aware of the Debt Relief Act of 2007 that was extended till December 31, 2013. When homeowners receive a 1099 C (cancellation of debt) after a short sale, homeowners might not have to pay income taxes on any cancellation of debt income to the extent that they are insolvent immediately before the cancellation — that is, their debts exceed the value of their assets, homeowners must consult with their accountants in filling a form called 982, which is also on the government website: http://www.irs.gov/uac/Form-982,-Reduction-of-Tax-Attributes-Due-to-Discharge-of-Indebtedness-(and-Section-1082-Basis-Adjustment). You’ll always have the option to cancel a short sale.
Make sure your realtor is aware of a CAR (California Association of Realtor) form called “Mortgage Assistance Relief Services, Short Sale negotiation Notice” This will allow you to stop doing business with your Realtor at any time and there is a section where you both will agree to a certain amount if you decide to cancel, make sure you mark that down that you will not have to pay any commission.
Short Sale is still a better alternative where you will have clean conscience that you have done the right thing, you will have stress relieve because you will know exactly what steps to take till closing. You also will be compensated for cooperating with the bank for doing a short sale.
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Please call Ken Go of 1st Innovative Finance Group at (562)697-7028 or write to [email protected].