On the Brink

Over the years I have worked with a number of clients who have faced the daunting decision of whether to stay in their home and suffer a tremendous financial burden; or, sell their home at a loss, and start over again. The latter would involve short selling their home; which in effect is defaulting on their mortgage. The underlying concern for each and every individual I have worked with that was facing this impossible decision, was the struggle they faced over doing the right thing (making good on their debt), or jumping ship before the burden of their mortgage took their entire family down, financially.

In nearly every case, the decision to consider short selling their home wasn’t primarily based on the declining real estate market, and the effect of that on their home value. Rather, it was some other dynamic in play; more often than not some interruption of income, job loss, medical issue, or some combination of those three. Despite what appeared as an obvious choice (sell the home at a loss and regroup); their inner instinct was always to try to figure out a way not to default on  their loan. Some individuals and families endured this struggle for a year or more; which over time would cost the tens of thousands of dollars.

It’s never an easy decision; and for now, there will be many, many more short sale transactions occurring over the next several years. I have many clients who couldn’t explain to me the level of relief they felt after short selling their home and avoiding a foreclosure action. The following article explains the nuts and bolts of the process; which while difficult to consider, is a very viable solution to foreclosure, which is the worst outcome.

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Foreclosure Alternative: The Short Sale

Facing foreclosure and tempted to stay in your home until the bank pulls it  out from under you? Bad idea. Don’t do it. A much more graceful exit is a short  sale, an agreement between you and your lender to sell your home for less than  you owe. Although there’s no guarantee that your lender will let you avoid  foreclosure with a short sale, new government regulations are aimed at  encouraging lenders to do so.

Short sales get government incentives

Although short sales are not hassle-free, at least you’ve got the government  backing you. The Home Affordable Foreclosure  Alternatives (HAFA) program provides financial incentives for lenders and  borrowers to avoid foreclosure through short sales or deeds  in lieu of foreclosures.

Participation in the HAFA program requires adherence to guidelines—including  a standard process and minimum timeframes—that speed the process, says  Dallas-based REALTOR® Tom Branch, co-author of Avoiding Foreclosure: The Field  Guide to Short Sales. The HAFA program is for homeowners who can’t keep their  homes with the help of a loan  modification.

Advantages of a short sale process

  • You can be a homeowner again more quickly with a short sale in your past  than with a foreclosure. New Fannie Mae guidelines help you qualify for a new  mortgage in as little as two years after a short sale, as opposed to up to seven  years after a foreclosure.
  • You will have more time to make relocation plans and save money than with a  deed in lieu. A short sale may take four to 12 months. A deed in lieu of  foreclosure arrangement typically requires you vacate your home within 30 to 60  days of signing, according to real estate attorney Lance Churchill.
  • You can receive up to $3,000 from your lender for moving expenses at the  time of closing of a HAFA short sale or a HAFA deed in lieu of foreclosure.  Relocation funds are part of the incentives of HAFA, but not necessarily for  other short sale or deed in lieu programs of the lenders.
  • You can help your community’s home values. Because the lender often receives  a higher amount of the remaining loan balance than it would from the sale of a  home after a foreclosure, short sales help support home values in the  surrounding community.

Disadvantages of a short sale

  • Your credit  score will take a severe hit. But that would happen anyway with a  foreclosure. Fair Isaac, creator of the FICO score, says foreclosure and short  sales have virtually identical impacts on your credit score. VantageScore—a  company that has created a credit score model for consumers—says a short sale  will lead to only a marginally lighter hit when compared with foreclosure.
  • You may owe additional taxes. In the past, if your outstanding mortgage was  $100,000 and your lender accepted a short-sale purchase offer of $90,000, you  were liable for income tax on the forgiven $10,000, says Harlan D. Platt,  economist and professor of finance at Northeastern University in Boston.  However, the Mortgage Forgiveness Debt Relief Act of 2007, which runs through  2012, generally allows taxpayers to exclude income from the discharge of debt on  their principal residence in some circumstances. Full relief is  available only if the amount of forgiven debt doesn’t exceed the debt that was  used to acquire, construct, or rehabilitate a principal residence. Consult a tax  professional and an attorney to minimize or avoid this liability.
  • In some states, your lender may still be able to come after you for the  difference between the short sale price and the amount needed to pay off the  mortgage. Your actual agreement with your lender and state and local laws and  regulations spell out the details. Consult a tax professional and an attorney to  minimize or avoid this liability.

How to proceed with a short sale

  • Find a qualified REALTOR® experienced in short sales. Short sales are tough  to navigate, and they’re further complicated by your loan type—FHA vs. Veterans  Administration vs. conventional loans. Real estate agents who specialize in  short sales will know the proper steps and order of the steps involved. They’ll  also be able to navigate the many parties involved in the process and  over-burdened loss mitigation departments. Look especially for agents who have  Short Sales and Foreclosure Resource (SFR) Certification, which requires  specialized training.
  • Gather evidence to support your need for a short sale as opposed to a  foreclosure. You’ll need to prove that you have little or no equity in your  home, you’re behind on your payments, and you’re no longer able to afford your  home. You’ll need to write a hardship letter to the lender describing your  circumstances, such as a divorce, job loss, illness, death, or other event that  has impacted your income.

A short sale can be a time-consuming process, but if you can avoid  foreclosure, it’s worth it in the long run.

Read more:  http://www.houselogic.com/home-advice/facing-foreclosure/foreclosure-alternative-short-sale/#ixzz1v33GZ7Xb

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Categories: Q & A

Author:Marino Real Estate

Specializing in residential and commercial real estate sales for the better part of a decade, my approach to real estate involves establishing a trust with my clients, that contributes to the ultimate success of our transaction. Whether it is a personal residence, or an investment property, I am committed to negotiating the best deal for my clients, and have enjoyed a history of meeting the important and unique needs of the many clients which have entrusted me with thier real estate goals.

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