If you’re asking yourself “Should I short sale my home?” the answer is not as simple as we would like to believe. Be sure to think through some of the obstacles and victories to a solution that very well may be to your advantage. First, let’s understand the term “short sale” and what it means.
What is a Short Sale
Let’s make it brief, a short sale is an agreement between your lender/bank and you (the homeowner) to sell the home for less than what you owe because of your financial hardships, such as loss of job, reduction of work payments, divorce, illness, etc.
Here’s an example…if you owe $400,000 on your home and the current market value is $275,000, you will only be able to sell your home for $275,000 with the approval of your lender/bank. Sounds simple, right! But it’s not. There are other factors such as deficiency judgments, tax liabilities, and credit destruction that must be considered prior to making a final decision to short sale. Take a look at some of the obstacles that can become victories.
A short sale solution may not be the ideal option for the homeowner that really wants to stay in their home; however it is an option that will avoid foreclosure and other drastic consequences. Beware of the obstacles that may arise after the home is sold, such as a deficiency judgment and tax debt delinquent credit, etc.
Some lenders in certain states may issue a deficiency judgment which means that you will be responsible to pay back the difference of the shortage . A lender may issue a deficiency judgment for any outstanding balance owed after the short sale (e.g., the difference between $400,00 – $275,000 = $125,000).
However, in states like California the passage of “California Anti Deficiency Law SB 931, effective Jan. 1, 2011, after the short sale of a residential property of one-to-four units, the holder of the first deed of trust (or first mortgage) cannot pursue the borrower (seller) for any deficiency under the note. If the lender consents to the short sale in writing, the lender is obligated to accept the sale proceeds as payment in full and the note is considered fully discharged.”
Other states have passed anti-deficiency laws that prohibit the pursuit of a homeowner for a deficiency judgment(see the Chart of State Foreclosure Process).
However, some lenders are willing to forgive and discharge the difference of the debt which would mean you have taxable income. However, with the implementation of the Mortgage Forgiveness Debt Relief Act, a law that absolved homeowners from having to paying taxes on a discharged debt means that you will be able to walk away without any serious tax liabilities. That’s why it is imperative that this program be extended through 2013. (Be sure to read the article What Happens if the Mortgage Forgiveness Debt Relief Act is NOT Approved?)
Recovery from a short sale is, by far, less stringent than a foreclosure. So the question again becomes “Should I short sale?” Of course, I am opinionated with regards to this question because I would much rather see a homeowner leave their home by short selling and avoid other repercussions such as tax liabilities, deficiency judgment and negative credit impact. Unless you are a victim of mortgage fraud and want to pursuit a lawsuit, a short sale or deed in lieu of foreclosure would be your way out of this dilemma.
It is without a doubt that a foreclosure on your credit report would have a significant negative impact on your credit related to current and future employment. It could possibly cause reassignment or even termination.
A foreclosure on your credit will remain for 7 years and could mean a drop in your FICO score of 150 to 250 points. Whereas a short sale will only be reported as late mortgage payments and recorded as a negotiated or paid sale after the transaction has closed. In addition, your FICO score will have lost far less points, as little as 50 points.
The short sale process can be a long and tedious process. You and your listing agent may find several prospects that want to purchase your home, but because the process is so slow in receiving approval from your lender…. you may lose your potential buyer. Be sure to read What is the Process of a Short Sale?
Buying Another Home
There’s all kinds of misguided information on the internet about how long one must wait before they can purchase another home, so here’s the real truth
If you purchase under conventional guidelines, that means the loan is being sold to Fannie Mae or Freddie Mac, and you had a short sale, it’s about 2 years. If there was a foreclosure, it could be 4-5 years depending on how well you have re-establish your credit. A 740 FICO score and 10-20% downpayment is required
If you purchase under government guidelines…meaning a FHA loan, most underwriters treat a short sale as a foreclosure, therefore they require a minimum of 3 years before you can purchase a home. A minimum FICO score of 620 is required with a 3.5% down payment. Don’t let the 620 FICO score fool you; there will be a premium price to pay with regards to the additional charges/add-ons to your interest rate because of the low score. Therefore, my suggestion to you is be extremely diligent about rebuilding your credit to buy your next home.
A short sale may be the answer for those that want to be freed from the mortgage obligations and the responsibility of owning a home. In addition, after having reviewed the obstacles and victories above, hopefully you will have gained some insight forthcoming.
Whatever you decide, I wish the best for you and your family. Please share your thoughts.