It’s not hard to find chatter concerning how a short sale or a foreclosure affects your credit.
Frankly, the differences between a deficiency judgment and a negotiated note from a short sale are considerable.
There’s no gray area here….
A short sale involves the negotiated sale of the property on behalf of the borrower to a third party for less than what is owed to satisfy the mortgage and release the lien, as agreed to by the lender, investor, and the mortgage insurer, and occurs prior to the redemption date.
The short sale of real estate is not a questionable practice in today’s troubled real estate market. It may actually be a necessity. The short sale transaction is legal and almost always the most beneficial alternative to foreclosure or even bankruptcy. Lenders are motivated to accept short sale offers to for many reasons, and the short sale of your home can result in a benificial situation for all parties involved.
In some cases if the lender is aware you are attempting to sell your home, or if there is an offer, the foreclosure process may be postponed in hopes that it will be sold, thus saving them from incurring additional expenses.
Who pays the real estate commission and seller’s when a home is sold in an approved short sale?
The lender pays those costs!
Will I qualilfy for a short sale?
There are many factors that will determine whether or not you qualify for a short sale. Some of them are:
- The condition of the property
- Other liens filed against the property
- Are you in bankruptcy proceedings?
- Does the homeowner’s mortgage insurance or loan document prevents the lender from doing a short sale?
- Is there a legitimate “hardship” that has caused the homeowner to get behind in payments or face foreclosure?
- Will the bank be better off financially through a short sale, selling it at a foreclosure auction, or selling it as a bank owned property?
- How much time is left before the redemption date?
- Bottom line: It is ultimately up to the bank to determine if the homeowner and the property will qualify for a short sale.
Advantages of a Short Sale:
Benefit to Borrowers:
- Avoid Foreclosure
- Loan is often reported to credit bureaus as satisfied
- Least likely to receive deficiency judgement
- Minimizes negative credit impact
- FHA Lenders will allow you to purchase again after a 2-year time period following completion of the action.
- Less overall negative impact to your credit score
Benefit to Lender:
- Avoids/ minimizes legal costs and legal fees
- Avoids/Minimizes other incurred costs
- Home is often in better condition than one that fell to foreclosure
- Achieve maximum yield for the lender/servicer
Will there be any tax consequences to doing a short sale?
Typically, the tax consequences will be far less severe than letting the home go to foreclosure. If the home is sold at foreclosure auction, you will often receive a 1099-A for the amount the lender lost due to the sale. In a short sale, most lenders will give you a 1099-C for the amount they have lost due to the short sale, if they decide to not seek a deficiency judgment (in almost EVERY case they will opt to send you a 1099-C for the amount of the loss). We always recommend that you consult with a CPA regarding tax implications. Additionally, we recommend that you become familiar with IRS form 982 prior to deciding the pursuit of a short sale.
Can the bank give me a 1099-C and report my credit as paid less than agreed?
Legally? No. Do they do it anyway? Yes. So, you will need to keep that 1099-C as proof that they ‘wrote off’ that loss by essentially ‘giving you the difference of the purchase price and amount owed as income’. The bank can not legally report ‘paid less than agreed’ to the credit bureaus if they accepted partial payment of the note and also sent you a 1099-C (income to you) for the difference of that note. Talk to a real estate attorney for clarification on the subject. If needed, you or your attorney can contact the bank at a later date about ‘fixing’ their slight oversight in sticking it to you twice.
Can the bank seek a ‘deficiency judgment’ for the amount they lose by accepting a short sale?
In most states yes, but a lot of the time they will opt to send you a 1099-C and write it off as a loss on their books, or forgive the debt alltogether. The thing that you should know is that VERY FEW lenders will seek a deficiency judgment due to the cost to get the judgment and fact that you probably can’t pay it anyway. 99.99% of the time the lender will send you a 1099-C instead of persuiting a deficiency judgment, even when they can legally seek that option.
Once they have sent you a 1099-C, they cannot seek a deficiency judgment. They can only do one or the other, not both.
The amount of loss to the bank is usually less in short sale, thus the amount of the 1099 (if any) to the homeowner in a short sale is less as a result.
You will want to have an expert on your side dealing with the lender!
Our Mission
Our commitment to the homeowner is conducting each negotiation with excellence and assist in an effective short sale for homeowners while minimizing subsequent liability. Each homeowner’s situation is treated as if it is our own. We endeavor to make the process smooth, private, and as free from stress as possible while perpetuating honesty and integrity throughout the transaction.
Effective Short Sale Negotiators
We are a team comprised of experienced Realtors, Title Professionals, Legal Council, and Support Staff focused on your transaction. Inequity or short sale properties are our primary focus. We are effective because our Team has experience working with multiple Lender’s loss mitigation departments, and have been trained in short sales as a specialty. Our trained staff of mitigaton experts make every effort to analyze, negotiate, and assist in the successful closing of Short Sales.
What We Do
We assist homeowners and mortgage services in negotiating down the amount owed on a home loan. It creates a win-win situation for all parties by providing the homeowner an option before their property is foreclosed upon, and by achieving maximum yield for the servicer.
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