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Short Sale vs Foreclosure – 10 Common Myths Busted

The Good Hoods Group – 619.928.9006 – http://short-salesandiegohome.yourkwagent.com/  
Short Sale vs Foreclosure – 10 Common Myths Busted
by Brandon Brittingham

It’s likely you’ve heard the term “short sale” thrown around quite a bit. But what, exactly, is a short sale?

A short sale is when a bank agrees to accept less than the total amount owed on a mortgage to avoid having to foreclose on the property. This is not a new practice; banks have been doing short sales for years. Only recently, due to the current state of the housing market and economy, has this process become a part of the public consciousness.

To be eligible for a short sale you first have to qualify!

To qualify for a short sale:

  • Your house must be worth less than you owe on it.
  • You must be able to prove that you are the victim of a true financial hardship, such as a decrease in wages, job loss, or medical condition that has altered your ability to make the same income as when the loan was originated. Divorce, estate situations, etc… also qualify.

Now that you have a basic understanding of what a short sale is, there are some huge misconceptions when it comes to a short sale vs. a foreclosure. We take the most common myths surrounding both short sales and foreclosures and give a brief explanation. LET’S BUST SOME MYTHS!!

1.) If you let your home go to foreclosure you are done with the situation and you can walk away with a clean slate. The reality is that this couldn’t be any farther from the truth in most situations. You could end up with an IRS tax liability and still owing the bank money. Let me explain. Please keep in mind that if your property does go into foreclosure you may be liable for the difference of what is owed on the property versus what is sells for at auction, in the form of a deficiency balance! Please note this is state specific and in most states you will be liable for the shortfall, but in some states the bank may not always be able to pursue the debt. Check your state law as it varies widely from state to state.

Here is an example of how a deficiency balance works

If you owe $200,000 on the property and it sells at auction for $150,000, you could be liable for the $50,000 difference if your state law allows it.

Not only could you be liable for the difference to the bank, but in some situations you could also be liable to the IRS! Although there are exemptions (mostly for principle residences) under the Mortgage Debt Forgiveness Act, there are times when you could be taxed on both a short sale and a foreclosure, even in a principle residence situation. Since the tax code on this is a little complicated and I am not a CPA, I advise always talking to a CPA when in this situation as you are weighing your options. Hard to believe? Well, believe it or not, the IRS counts the difference between the sale and the charged off debt as a “gain” on your taxes. That’s right-you lost money and it’s counted as a gain! (I didn’t make that rule, that’s a wonderful brainchild of the IRS). Banks and the IRS can go as far as attaching your wages. Not to mention if you let your home go to foreclosure you will have that on your credit, as well.

Guess What? A short sale can alleviate your liability to the bank, in most situations. There are also exceptions to this, but in most cases banks are releasing homeowners from the deficiency balance on a short sale.

2.) There are no options to avoid foreclosure. Now more than ever, there are options to avoid foreclosure. Besides a short sale, loan modifications along with deed in lieu are also examples of the many options. In most cases (but not all) a short sale is the best option. Either way, there are more options today than there have ever been to avoid foreclosure.

3.) Banks do not want to participate in a short sale, or, it is too hard to qualify for a short sale. Banks would rather perform a short sale than a foreclosure any day. A foreclosure takes a long time and creates a huge expense for the banks; a short sale saves both time and money. Banks have more foreclosure inventory than ever before, and certainly do not want any more. Banks more than ever welcome short sales. Qualifying for a short sale is easier than you think, you need to have a true financial hardship, or a change in your finances and your house has to be worth less than what you owe on it. Not only do consumers, but banks also now have government incentive to participate in short sales.

4.) Short sales are not that common. At this present time, short sales range from 10-50 % of sales in various markets and it is predicted that in 2012 we will have more short sales than any other year, to date. Due to economic changes in the last few years, this is something that is affecting millions of Americans. Short sales are in every market, and are not just limited to any particular income class. This has affected everyone from all facets of life. A short sale should be looked at as a helpful tool, not a negative stigma. That is why the government is offering programs that actually pay consumers to participate in short sales. It is not just affecting one community; it is affecting communities and consumers across the nation.

5.) The short sale process is too difficult and they often get denied. Though the short sale process is time consuming; it is not as difficult as the media would have you believe. The problem is that most short sales are denied because of a misunderstanding of the process. It is true that if the short sale process is not followed correctly there is a good chance of getting denied. An experienced agent knows how to avoid this. Short sales require a lot of experience, and a special skill set. If you are looking to go the option of a short sale make sure your agent is skilled and experienced in this area.

6.) Short sales will cost me money out of pocket. A short sale should not cost you any out of pocket money. In fact, you could get between $3000-up to $30,000 to participate in a short sale. In many ways, a short sale may put you in a better financial position than prior to the short sale. Almost every short sale program now has some type of financial incentive for the home owner, as long as it is a principle residence, and we are even seeing relocation money being paid on some investment/second homes. As a seller of a property you should never have to pay for any short sale cost upfront to any professional service. Realtors charge a commission that is paid for by the bank. In most communities there are also non-profits and HUD counselors who can help you with foreclosure prevention options for free. The only potential cost you could incur is if the bank would not release you from a deficiency balance in the short sale, which is happening less and less now.

7.) If I am behind on my payments, I can perform a short sale any time. The farther you get behind on your payments, the harder it is to get a short sale approved. The closer a property gets to a foreclosure the harder it is to convince the bank to perform a short sale. As they get closer to a foreclosure sale more money is spent, thus deterring them from doing a short sale. If you think you need to perform a short sale, time is of the essence; the sooner you start the process, the better. Waiting too long can trigger the ramifications of a foreclosure, losing the ability to do a short sale as a viable option.

8.) I have already been sent a foreclosure notice so I can’t perform a short sale. For the most part just because you received a foreclosure notice or notice of default it does not mean that you do not have time to perform a short sale. The timeline and specifics do vary from state to state, but having done short sales all over the country, I have seen banks postpone a foreclosure to work a short sale option as close as 30 days prior to the scheduled foreclosure auction, but the longer you wait the less chance you have. If you have received a legal foreclosure notice, please reach out to a professional right away. The longer you wait, and the closer you get to foreclosure, the fewer options you have. If you have received a notice to foreclose this means the bank is filing paperwork and starting the process to take legal action to repossess the house. You still have time at this point to prevent foreclosure, but do not hesitate! The closer you get to the foreclosure date the harder it becomes to negotiate with the bank for whichever option you choose.

9.) I was denied for a loan modification, so I know I will get denied for a short sale. Short sales and loan modifications are handled by two separate departments at the bank. These processes are totally different in approval and denial. If you got denied for a modification you can still apply for a short sale; in some cases you can get a short sale approved faster than a loan modification, as some loan modifications are denied because they cannot reduce the loan low enough based on the consumers income.

10.) If I go through a short sale I cannot buy another house for a long time. The time to buy another house depends on your entire credit picture and can vary from 12-24 months. There are even a few FHA programs that allow for a purchase sooner than that. I have worked with clients who went through a short sale and bought another house in less than 12 months.

These are just a few of the common myths surrounding short sales and foreclosure. With the options available today, no homeowner should ever have to go through foreclosure, and hopefully this information can help a few more homeowners think twice before walking away from their home not realizing the possible long term ramifications a foreclosure can have.

What is a Short Sale? San Diego Short Sale Specialist Answers The Question…

James Renfro|The Good Hoods Group|http://shortorstay.com/thegoodhoodsgroup/| (619)928-9006
WHAT IS A SHORT SALE?
San Diego Short Sale Specialist Answers The Question…….
WHAT IS A SHORT SALE?
A “Short Sale” (Also referred to as: “Negotiated Settlement”, “Short Pay”, or “Pre-Foreclosure”) occurs when a Lender agrees to accept less than the amount owed on the original note or total payoff, as an alternative to foreclosure. If the property is worth less than the amount owed on the loan, even a foreclosure would result in a loss for the Lender. Often a Lender’s bottom line will dictate the benefits of accepting less money in a sale now versus the cost of the foreclosure process and selling the home as its new owner.
HOW LONG WILL IT TAKE?
The Short Sale negotiation process can be rather lengthy. It may take several weeks to several months for an approval. Many Lenders will have several layers of bureaucracy, insurers, and investors to maneuver through in order to get a Short Sale approved. It is important to be patient during this long process.
BUT MY HOUSE IS GOING TO FORECLOSURE, WILL I HAVE ENOUGH TIME?
Maybe – Maybe Not. Accepting a buyer’s offer WILL NOT automatically stop the foreclosure process. However, many times a Lender can be persuaded to delay the foreclosure to allow an attempt to negotiate the Short Sale. There are no guarantees, but many sellers have been successful.
HOW DO I KNOW THIS WILL WORK?
There are no guarantees. No promises will be made. A missed payment means the Lender has the option to foreclosure. Presenting alternatives to the Lender that highlight the benefits of the Short Sale as opposed to moving forward with a foreclosure is part of the negotiating process. We are skilled at what we do, but NO GUARANTEES will be made concerning the Lender’s acceptance of the Short Sale.
WILL I GET ANY MONEY FROM THE SALE?
Not unless you are apart of a Government Short Sale Incentive Program. A universal requirement of Lenders when approving a Short Sale is that the owner/borrower will not get any proceeds from the sale of the property. The Lender will be accepting a loss on your loan; they will most certainly allow you to profit from the situation.
WHAT HAPPENS IF THIS DOESN’T WORK?
Your house will likely go to foreclosure. A Short Sale is something tried after you have exhausted your other options.
WHAT IS A “RELEASE”?
A Lender may offer a release” which is a security instrument against the property in exchange for a repayment of less than the total amount of the loan. A release will allow the property to be sold without paying off the obligations of the loan. A release will allow the property to be sold without paying off the obligations of the loan. However, the loan is not satisfied. Advantages: A successful Short Sale will allow the property to be sold thus avoiding foreclosure . Disadvantages: The remaining debt on the property (sometimes called a “deficiency”) still exists.
You are still liable for the loan and still owe the money to the Lender. Reality: The California Revised Statutes allow certain time periods for first and subordinate lien holders to pursue a deficiency judgment. Keller Williams and its associates recommend sellers seek the advice of a qualified expert on deficiency judgments.
WHAT IS A SATISFACTION?
A Lender may agree to accept less than owed as complete and total satisfaction of the loan and release its lien against the property. Advantages: Your note and obligation to the Lender are satisfied for less than you owed. When the property is sold, the debt is paid off completely. Disadvantages: You may have some tax consequences as a result of the debt relief. Keller Williams and its associates recommend you discuss potential consequences with a qualified tax adviser.
HOW CAN I HELP?
The Lender will require a review of financial package that usually includes: two (2) months of bank statements, two (2) months of paycheck stubs, two (2) years of tax returns, a Financial Worksheet and possibly other information. The leading reason for delay and eventual denial of a short sale approval by the Lender is due to the Seller’s failure to cooperate and/or deliver the necessary documents in a timely manner.
To help your success in this Short Sale, please immediately collect as much of this information as possible, complete the attached “Financial Worksheet”, and return it to this office. These things will help increase your likelihood of a successful Short Sale.
There are times when tough questions deserve an honest answer. A question homeowners like yourself are asking every day is, “Do I short sale my home or stay and tough it out?” Either way, to make the best decision, you should have all of the information in front of you.
Please take a moment out of your day to try out the Short or Stay Calculator.
Being able to see the current market value of your home and projecting when your investment will break-even and become an asset again is invaluable to your decision making process. With the Short or Stay Calculator you’ll be able to do so in a matter of minutes.