Short Sales are Up All Over the Place

As lenders are seeing the obvious advantages of short sales, they are increasing all over the country. For instance, in November of last year, 9% of single family home sales were short sales. Short sales had increased more than 30% from the previous year. More and more banks are offering incentives for short sales, and they had increased from January 2011 to January 2012 as well. Even government foreclosure prevention programs are offering short sale incentives. Bank of America did 107,000 short sales in 2011, up from 92,000 the previous year and twice as many as 2009.

Short Sale Incentives

Bank of America is the largest servicer of home loans, and like JP Morgan Chase and Wells Fargo, has started to offer attractive incentives for short sales. JP Morgan Chase has been offering up to $35,000 as short sale incentives, and Wells Fargo offers anywhere from $3,000 to $20,000. Bank of America has started testing whether incentives will be beneficial for them as a company. InFloridalast fall, Bank of America began offering incentives from $5,000 to $25,000. Even with these attractive incentives, companies can save money by doing short sales rather than foreclosures.

What is a Short Sale, Exactly?

A short sale is often done when a home is facing foreclosure. With a short sale, the lender agrees to sell the home to an interested buyer at less than the cost of the mortgage. The hit a homeowner takes to his or her credit is lesser than that associated with a foreclosure, and the buyer (often a real estate investor) receives benefits as well. The homeowner will often have to file the difference between the sale price and the mortgage price on his or her taxes as received income, but many still prefer the short sale over the foreclosure.

Bank of America testing the waters for short sale incentives is another positive sign that these incentives will grow with the coming months. More and more are seeing the benefits of short sales, and the numbers are going to increase significantly. In states where foreclosures are a longer process, short sales are definitely going to increase, leaving everyone involved with a slightly better situation than a foreclosure.

Image: Suvro Datta / FreeDigitalPhotos.net

Many homeowners face troubled times when they’re unable to pay for their house note. If there are no emergency fund reserves and a period of time goes by where no payments are made, those homeowners can be at risk of losing their home through foreclosure. However, they can also hold a short sale for the home if they choose. By understanding the difference between a short sale and a foreclosure, individuals can determine what their choice would be if they get into a sticky situation with their home payments.

Understanding a Foreclosure

When the loan goes into default, the lender may attempt to take possession of the property through a process called foreclosure. They begin the proceedings with the assistance of an attorney and the court, going through a strict legal process. During the process, the homeowner will have a chance to stop the foreclosure by paying the amount in arrears, but if that doesn’t happen, the foreclosure will typically go through. In a foreclosure, the homeowner must leave the property and no longer has any ownership claim over the home. They will also still be responsible for the unpaid loan amount that remains on the home.

Understanding a Short Sale

A short sale is very different from a foreclosure. In this process, the lender will agree to receive less than the full loan as a payoff for the homeowner’s property. Typically, this happens when the homeowner isn’t making payments and is at risk for a foreclosure. The lender will not receive the amount of the loan, but most of the time they’re willing to accept it because it’s better to receive a large portion of the loan than none of it at all. In addition to that, it’s costly for lenders to go through the process of foreclosure, so if it can be avoided, most lenders will do so.

During a short sale, the homeowner remains on the paperwork for the home and is seen as selling the home personally to an interested buyer. A short sale can help stop a foreclosure, and there are some benefits to stopping a foreclosure with a short sale.

Benefits and Disadvantages of a Short Sale

There are many benefits of a short sale. The reason most people attempt short sales is to avoid the stigma of having “foreclosure” on their credit report. This is an effective way to prevent that from happening, and it also allows the homeowner some peace of mind, since they won’t owe the entire amount of the home loan. However, there are unique disadvantages as well.

After the short sale, the lender will send papers to the homeowner that specify the amount left over after the buyer pays for the home in the short sale. So, the original mortgage minus the buyer’s amount will be the responsibility of the original homeowner, typically to pay taxes on. In addition to that, a short sale can still affect the homeowner’s credit report negatively although not as badly as a foreclosure would.

Sometimes, choosing between a foreclosure and a short sale is choosing between two evils, or deciding which is the lesser evil.

Image: Stuart Miles / FreeDigitalPhotos.net

If your home is in danger of going into foreclosure, you are probably weighing your options and trying to determine a way to stop it now. Most people know that a short sale is one way from stopping a foreclosure, but is it worth it? It’s important to understand the process of a short sale and what happens after, in order to make an informed decision about whether or not to have one.

Foreclosure Kills Your Credit

The worst thing about a foreclosure is that it goes on your personal credit report, and will act as a repellent for any lender for at least 8 years. Most lenders won’t go anywhere near an individual who has a foreclosure on their credit report. In fact, most lenders will ask up front if you do before having you fill out a loan application. A short sale may help you avoid the stigma that a foreclosure places upon you and your credit rating. However, it should be known that a short sale can still affect your credit rating, reducing it by as much as 200 points in some cases.

Differences on Credit Report

The good thing about having a short sale present on a credit report rather than a foreclosure is that it will show up as a discharged debt that wasn’t paid in full rather than a debt which went into default. What this shows potential lenders is that while you’ve had obvious financial trouble, you’ve done what you could to take care of your responsibilities. This may make lenders more likely to loan money to those with a short sale on their credit report rather than a foreclosure.

Peace of Mind

Another great advantage of a short sale is that it allows homeowners to sell their properties respectfully, providing them with peace of mind. In a short sale, the homeowner is in control. They will negotiate with the lender in order to sell the home for a smaller price. Although typically, a short sale price is lower than the amount of the mortgage on the home, it’s better to have a smaller amount of debt than the whole amount of the mortgage.

Attempting Homeownership Again

When individuals opt for a short sale rather than a foreclosure, they have a better chance of borrowing for another home sooner. For instance, in order to purchase a new primary residence, Fannie Mae requires a two year waiting period for individuals who have had a short sale rather than the five year waiting period required for those whose homes have gone into foreclosure. This means men and women who choose a short sale rather than a foreclosure will have a shorter journey into homeownership in the future.

Overall, the choice between a short sale and a foreclosure is an individual preference. However, many people view foreclosure as the very last resort. While a short sale isn’t a homeowner’s ideal situation, it can often be better than a foreclosure for several reasons.

Short sale is one of the options through which you can avoid a foreclosure. Though you won’t be able to save your home through short sale, you will at least be able to do away with the lender bossing over the sale of the home. Short sale is one of the debt relief options for your secured debt – the home loan. This is more like debt settlement in which you can get some part of the debt forgiven. In case of short sale too, some part of the mortgage debt gets forgiven.

Debt cancellation and short sale

Though lenders in all of the cases do not agree to a short sale request, in some situations they may agree to the same. Actually, foreclosure is a lengthy and complex and costly process. So, if the lender realizes that it won’t be of much help to foreclose the home, he may agree to the short sale request. Moreover, short sale is a much faster process in comparison to foreclosure.

In case of a short sale, the actual amount which you would have been required to pay gets forgiven. That is, the lender agrees to take whatever the home sells for; even if the amount is lower than what you actually owe on the mortgage.

As a mortgage is a secured debt, you won’t be able to use any of the other debt relief options to mange and pay off the home loan. For example, you won’t be able to opt for debt settlement or debt consolidation in order to pay off the mortgage. Thus, short sale is considered to be one of the debt relief options with regards to this secured debt of yours.

So, if you are having problems with making the payments on your mortgage, you can try to determine if you qualify for a short sale. For that purpose, you can take the help of an attorney or loan advisor; to make things easier for you. You can also discuss the matter with an accountant and the tax ramifications with regards to the process.

It is important to follow the right process so that you do not make any kind of mistakes while short selling your home. Otherwise, you will only end up aggravating your problems. In addition, you may also get scammed by the lender and the buyer. So, you should also be aware of the nuances of mortgage debt and short sale.

You should be aware of the Mortgage Forgiveness Debt Relief Act. This can also help you with selling your home in the right way. This also is going to clear your doubts on the tax consequences of a short sale.

Thus, you can see that a short sale is a debt relief option that helps you to get out of the debt obligation faster than usual.

Cons of a Short Sale

There are a few disadvantages of a short sale, and the most obvious is that you don’t get to keep your home. You will be selling the home to a third party (most often, an investor), and will have to move out or make other living arrangements. Another disadvantage is something most individuals aren’t aware of. When the investor pays a reduced price for the home, the remaining balance (the full mortgage amount minus the investor’s payment) is not completely forgiven.

The lender typically sends a 1099 form to the original homeowner that outlines the full remaining amount. This form will need to be filed with the homeowner’s taxes, meaning that it counts as income and will affect the taxes you owe as well as the taxes you get back. Most of the time, it severely increases the amount of taxes you will have to pay in the calendar year. It’s also important that you understand that the IRS will work with you to set up a payment schedule if you’re unable to pay your taxes all at once.

 Pros of a Short Sale

While there are disadvantages, some individuals feel that the advantages far outweigh them. For instance, the mortgage amount will not go against the homeowner’s credit rating. This is great for those who may try to get financed again in the future. When a home is foreclosed, the homeowner’s credit rating typically takes a very large hit, and it can make it nearly impossible to get financed again.

Another advantage is that the homeowner is forgiven for the majority of their debt to the lender. While they still have to file that 1099 form, it’s nowhere near as much as the original mortgage amount. This provides homeowners with breathing room. It also allows homeowners to experience relief from creditors and lenders constantly calling them or sending threatening letters, which can be a big drain.

Short sales are advantageous to the neighborhood and other homeowners in the area as well, because a foreclosed home is bad news for a neighborhood. Typically, when a property is foreclosed, the value goes down and it’s sold at a highly reduced rate. This can bring the property value of surrounding homes down with it, making neighbors and others nearby pretty unhappy. With a short sale, these things don’t happen.

Overall, a short sale can be very beneficial to some homeowners, especially those worried about ruining their credit with a bankruptcy or foreclosure. It’s important to take the time to consider both sides of the issue before making a decision, and then making the best decision to suit your specific needs and circumstances.  

]]> http://www.shortsaleforms.com/blog/2012/02/the-pros-and-cons-of-a-short-sale/feed/ 0 http://www.shortsaleforms.com/blog/2012/01/what-a-short-sale-will-mean-for-your-taxes/ http://www.shortsaleforms.com/blog/2012/01/what-a-short-sale-will-mean-for-your-taxes/#comments Tue, 17 Jan 2012 15:19:54 +0000 ssforms http://www.shortsaleforms.com/blog/?p=20 Homeowners facing foreclosure will often consider a short sale, a sale of the property where the mortgage holder agrees to take less than the current value of the mortgage,  that stops the foreclosure and often saves the homeowners’ credit ratings. Although a short sale can be beneficial, there can be many tax implications that affect the way your taxes must be filed and how much you will need to pay. It’s important to understand these implications and what options you have when it comes to a short sale.

What is a 1099c and how does it affect you?

A 1099c is a form that the lender sends to the homeowner after a short sale is made. The 1099c includes the amount that the bank has written off after the short sale was made. If the lender received $50,000 less than what the homeowner owed on the house, the 1099c would contain that amount. This amount must be filed as taxable income, which can severely affect the amount of taxes you have to pay. However, there are some exemptions, meaning that if you meet certain criteria, you don’t have to file the 1099c.

Exemptions

Some individuals are exempt from the implications of the 1099c form. According to the Mortgage Debt Relief Act of 2007, individuals who short sale their primary residence are exempt from the tax implications as well as those who did not pull money out of the property for any reason other than upgrading the primary residence. So, individuals who fall under these categories will not have to pay the taxes from the short sale. Those who still aren’t sure whether they would need to pay taxes on the 1099c form should speak to a tax professional to completely understand their situation.

State Tax Implications

Because different states have different laws governing short sales and the tax implications of short sales, it’s important to research specific state laws regarding short sales. In most states, the law will be very close to the federal law regarding exemption. For instance, in California those who meet the same criteria as required in the Mortgage Debt Relief Act will be exempt from paying state taxes after filing a 1099c form.

For Those Who Aren’t Exempt

Individuals who are not exempt from the tax implications of a 1099c form may end up having to pay taxes. However, even if the taxes end up costing more than you’re accustomed to paying, you can create a payment plan. Simply call the IRS and inquire about creating a payment plan. A representative will help you create a plan that will work for your finances and expenses. In many cases, the IRS can create a payment plan that gives you very low monthly payments until the final amount is completely paid. This keeps you on the good side of the IRS and doesn’t put you in a huge bind with your finances.

Overall, it’s important to understand the serious tax implications of having a short sale for your home and the subsequent 1099c form from the lender. This way, you will be prepared for all situations and use the information to determine whether this is the route for you or not.

If you have additional questions and would like more assistance, please contact us.

Saving Your Credit Rating

The most obvious advantage to a short sale is saving the borrower’s credit history. When the home is sold in a short sale it prevents a foreclosure for the borrower, and appears on the credit rating as a closed account rather than as a default or foreclosure. While some individuals feel that a short sale will still damage the credit rating, it’s certainly not as damaging as a foreclosure or bankruptcy.

Experts say a short sale can damage the credit rating by up to 200 points, making it more difficult to purchase a home in the near future. However, a foreclosure present on a credit rating can prevent individuals from purchasing a home for the next 7 years or more.

Getting Money to the Bank

Another huge advantage to a short sale is that the bank gets compensated for the home, and this is one of the main reasons banks approve many short sales. While they may not be getting the full value of the mortgage, they are avoiding the high costs associated with foreclosure and short sales typically sell for a higher value than foreclosures.

In most foreclosures, banks have to spend thousands of dollars for court fees, home maintenance and repairs, and more. In addition to that, they often have to wait several months to even take possession of the home. With a short sale, they receive their money and don’t have to put out money on those extra costs and fees.

Loss of the Home

The most obvious disadvantage of a short sale is that the borrower loses possession of the home and must make other living arrangements. In some cases, individuals can maintain possession of the home through other methods, such as filing bankruptcy, but most of the time, they’re going to lose the home anyway, so a short sale is beneficial.

Deficiency Judgments

Because the short sale price doesn’t always cover the mortgage price of the home, some banks will require a deficiency note, requesting the borrower pay off the an additional amount.  This can result in a judgment against the borrower, which will almost always go on their credit report.

Overall, a short sale can be very beneficial to a borrower who is desperate and doesn’t think he or she is going to be able to catch up on mortgage payments. However, understanding the process fully before jumping into it is important, in order to make the best decision for the unique situation and circumstances.