In todays real estate market, many homeowners are finding themselves living in a home that is worth less than what they paid. Some programs that were intended to make it easier to obtain financing and increase homeownership resulted in loans that required small or no down payments, interest only loans that do not build equity, and other loan programs that required such small payments that the loan actually INCREASES rather than decreases. Homeowners who financed their home with loan programs with low initial rates of one percent to two percent will experience dramatic increases in their monthly payment when the loan resets to the market rate. With the falling real estate prices, this puts homeowners in a very difficult position. Payments may be going up, while the value is going down. These along with other factors have contributed to a huge increase in home loan defaults and foreclosures. Hopefully, this article will help homeowners understand their options and the pros and cons associated with each one. Lets start by defining a short sale.

WHAT IS A SHORT SALE?

In a loan default situation, the lender may be willing to work with the homeowner to avoid foreclosure. For example, a homeowner in default who owes $300,000 on a property that is worth $250,000 may be able to convince the lender to allow the home to be sold for LESS than the loan amount, or even accept less than the amount owed as payment in full. This is known as a short sale. The lender may agree to a short sale to save the costs associated with a trustee’s sale, such as attorney’s and trustee’s fees, eviction, property repair, and resale costs. Additionally, a lender may agree to a short sale because, if the property is foreclosed upon, the loan becomes a “non-performing” loan on the accounting books, which may affect the funds the lender can obtain from the Federal Reserve for other loans.

WHAT A SELLER NEEDS TO KNOW

1.) A short sale can affect your credit score. Buying a home in the near future may not be possible. Lenders will look at a short sale in much the same way as they view a foreclosure since the whole debt is not recovered. It will probably be a minimum of two years before you are able to obtain financing for a home, and even longer before being able to obtain good financing.

2.) Although a lender may agree to a short sale, the VA or FHA may not agree to forgive the debt entirely and may require the seller to pay the difference as a personal obligation. The outstanding debt could result in a subsequent collection action. Therefore, the seller should be certain of the terms of any short sale before making a decision and obtain any debt forgiveness IN WRITING!

3.) A short sale in which the debt is forgiven may be treated as income for tax purposes. A lender who forgives a debt must submit a 1099 form to the IRS indicating the amount of the debt that has been forgiven plus the fees associated with it. (Note: The National Association of Realtors supports proposed legislation that would change this tax law.)

Sellers must convince the lender that it will fare better by agreeing to a sale for less than the outstanding loan amount. As a result, a short sale may involve more documentation than the original loan application since the seller must “reverse qualify” and prove that the seller is financially incapable of paying the loan. Also, different lenders have different short sale department names, so contacting the person who has the authority to authorize a short sale on behalf of the lender may require some persistence. The appropriate department may be called the loss mitigation, work-out, foreclosure, loan modification, or loan reinstatement department. It may be best to contact a real estate professional to assist you.

SHOULD I TRY TO REFINANCE?

It’s always good to explore all options. However, if more is owed on the property than it is currently worth, refinancing is not an option. Consult your real estate professional to inquire as to an approximate value for your home. He/She can help you to determine whether or not refinancing is a viable option for your particular situation. It’s always best to be informed.
Short sales can be very complex and risky transactions for everyone involved. Be sure to explore all options and understand the pros and cons for each. Should you have any more questions, please feel free to contact me. I am a real estate agent in the Phoenix, Metropolitan area and can answer any questions you might have that will help you to make an informed decision that will benefit everyone involved.