Facing Foreclosure – Should You Sell Short?

Facing Foreclosure – Should You Sell Short?
By Rovena Flores

Facing foreclosure is one of the most difficult situations in which homeowners can find themselves. As the default notices pile up, a decision looms ahead: should you accept foreclosure, or attempt to do a short sale? Up until recently, it’s probably safe to say that you may not have even heard of the term “short sale,” let alone what is involved. For that reason, many homeowners have let their home be foreclosed on, not knowing that they have options. After all, the decisions you make in this difficult situation now will affect you for years to come.

A short sale is when a bank agrees to take less for the sale of your home than you owe on the mortgage. It is not for everyone of course. There are a few criteria you must meet if you are interested in exploring this option.
• The value of your home has dropped. As the prices of homes fall, it’s not unusual for a homeowner to find themselves owing $300,000 on a mortgage for their now $250,000 house. If a bank believes it can avoid less of a loss and receive at least a portion of what is owed on the mortgage, they will consider selling the property short rather than putting it into foreclosure.
• You have fallen on hard times. You will need to write a letter explaining your hardship and why you will not be able to pay the difference between what you owe on your mortgage and what you will sell the home for. Examples might include; unemployment, bankruptcy, death in the family, medical emergency or sudden illness and divorce.
• You have little or no assets. Your current finances need to support your hardship. The lender will likely look into your financial situation and if it finds that you owe other real estate, stocks, bonds or have cash in your savings account, the lender will likely determine that you can pay them back the shortfall.

Don’t be fooled of course. This won’t be an easy process. A buyer must first make an offer on your home before you will be allowed to qualify for a short sale. So even if you meet all the other criteria, it is dependent on the lender accepting the buyer's offer. If the offer is rejected, a short sale will not take place.
You’re also not going to walk away scot-free. There are consequences just as there are with foreclosures. If the lender does agree to the short sale, you may be issued a 1099 tax form for the forgiven debt and forced to pay taxes on the shortfall. For example, if the bank receives $250,000 for the sale of your home but you owe $300,000, the bank will consider that $50,000 a gift and you may be taxed.
However, the Mortgage Forgiveness Debt Relief Act of 2007 generally relieves homeowners of any potential tax liability for the shortfall, if the home was used as a primary residence. The provision applies to up to $2 million in debt forgiven through 2012. Due to the potentially complicated tax issues, you should speak to a real estate lawyer and/or a tax accountant to determine the amount of consequences you could face with to a short sale.
Just like a foreclosure, a short sale will show up on your credit report. It is considered a pre-foreclosure that has been redeemed. While that may not seem as bad as having a foreclosure on your record, it will affect your credit rating 200 to 300 points, which is identical to a foreclosure reporting.
The biggest difference between a short sale and foreclosure is how long you have to wait to buy again. Chances are you will be anxious to begin rebuilding your future by getting back into the real estate market as soon as possible. If you let your home foreclose, you may have to wait up to seven years to buy again. With a short sale, the waiting period is two years. But, if you were never more than 60 days late with a mortgage payment, you may buy immediately. It’s yet another important reason to not get behind on your payments. Even if you are in the process of default, continuing to pay your mortgage can get you into a new home sooner rather than later.

The first step to take is to build a team to support you. Find a local real estate agent who is educated about and has experience in working with foreclosures short sales. For instance, a brokerage like Coldwell Banker Residential Brokerage has trained many of its agents in short sales to ensure clients receive the expertise and quality service they deserve. Your agent should be able to help guide you in the process, but will not be allowed to give you legal advice. For that, you will want to consult legal council to make sure you are protected. Taking the right steps now may be difficult, but may set you in the direction of making a full recovery.
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Rovena Flores