As foreclosures have diminished, plans for resolving them have diminished accordingly. The “Make Home Affordable” program (view at the Make Home Affordable tip sheet) program was the “go too” loan options during the immediate aftermath of the 2008 recession. Short sales do still occur but with less regularity than in the recent past. The information below provides some basic information regarding short sales.
THE SHORT SALE OPTION
(Italics represent the author’s comments)
Lenders often profer to participate in a short sale than to seek a foreclosure. Generally, the borrower retains occupancy during the sale and the process is less costly to the lender. There can be some borrower frustration when they find that, in spite of their willingness to participate with the lender, the process can be lengthy and convoluted.
It was anticipated that the Home Affordable program ( noted above) would decrease the need for short sales as borrower would be able to arrange payment plans to allow them to remain in their homes? Unfortunately, that hasn’t occurred for many and short sales remain the more common method for lenders to acquire and dispose of defaulted upon property.
A “short sale” transaction is one in which the home owner sells their home, with the consent of the lender, for “less than is owed”. Until recently, home owners escaped the tax consequences associated with the “forgiven debt” associated with short sales. The 2018 tax cut legislation reinstated the “phantom tax” that occurs. For instance, if the lender allows the home owner to sell for $50,000 less than owed on the mortgage, the borrower will pay taxes on the $50,000 as if it were income.
A BORROWER MAY HAVE TO CAREFULLY CONSIDER IF A SHORT SALE IS THE APPROPRIATE METHOD OF LIQUIDATING A HOME ON WHICH THEY HAVE HAD TO DEFAULT ON MORTGAGE PAYMENTS.
Lenders often suggested to borrowers that a short sale was less damaging to their credit than undergoing a foreclosure. Since the credit report is likely to show the participation in a short sale as having “settled for less than owed”, lenders are likely to consider a short sale much like having participated in a bankruptcy. The wait time before being eligible for home financing is typically 4 years for bankruptcy and short sale vs 7 years for foreclosure. But, tax ramifications (noted above) may force more persons into foreclosure situations?
The next phase to making this legislation most effective for short sale or foreclosure home sellers would be to amend the credit scoring models in regard to how said transactions affect the calculation of future individual credit scores. We have yet to see reliable evidence of how the borrowers’ scores are affected.
A borrower can contact their lender directly or contact a real estate licensee to help to arrange a short sale. Lenders are very willing to work with Real Estate representatives so borrowers may find it helpful to have an advocate working for them when negotiating with a lender.
In either situation, be prepared to confront several potential hurdles. The fact that a short sale is being considered means that the amount owed exceeds a possible sales price. If two loans presently exist on the property (i.e.; the first loan plus an equity line or second trust deed loan) it is likely that two different investors now “service” the two loans. While the first mortgage holder will likely be cooperative with your short sale request, the second mortgage holder will most likely be literally “wiped out” and lose their investment in any short sale. Acquiring the voluntary participation of the secondary lender in this kind of situation can not only be time consuming but can result in not being able to proceed at all. Complaints about the length of time it takes to consummate a short sale are more understandable when recognizing the position of any secondary lender.
If the borrower opts for the foreclosure route, they will escape the time frame required to negotiate between the two lenders. In either event, the borrower is urged to seek legal and tax advice.