Question 1: Do I have to be delinquent in order for my lender to consider a short sale?
Many lenders will approve a short sale, even if you are current on your payments. They will consider a short sale based on another hardship, such as a job transfer, job loss, or if you foresee that you will not be able to make the payments in the near future. Borrowers who stop making their mortgage payment may incur additional fees and charges. In addition, failure to pay your mortgage could result in the loss of your home and/or damage to your credit score.
Question 2: Will I be responsible for the deficiency?
The answer to this question is complicated and depends upon the particular circumstances of each short sale. Under the law in Utah, a lender unless otherwise agreed to in writing, has the right to pursue the borrower for the deficiency.
It varies from lender to lender and investor to investor, and each situation is unique. Some lenders may retain the right to pursue a deficiency but never actually pursue it. Some lenders may do a lien release only and you are responsible for the remaining balance of the loan. Some lenders may require a cash contribution or you to sign a promissory note at closing. Again, it varies for each file and the only way to know is to work through the short sale process. Further, there are certain government programs that insure that the lender will not pursue a deficiency but you must qualify for these programs.
Question 3: After a short sale, what is the deadline for the bank to sue me for the deficiency?
After a short-sale, unless otherwise negotiated in writing, the bank has three months from the date the release of mortgage has been released for single-family residences or six (6) years for all other properties[1] to file its lawsuit to collect on the deficiency
Question 4: Will a short sale hurt my credit?
Yes. If you become delinquent during the short sale process more than likely the lender is going to report the missed payments on your credit report. One missed payment can drop your credit score by over 100 points. A short sale is typically reported as “Settled” on your credit report. However, a short sale is typically better than a foreclosure in respect to your ability to rebuild and recover (see the chart below).
Question 5: Will I have to pay taxes on the forgiven debt?
Many people do not realize that if they negotiate with a creditor to reduce the debt they owe, they might be imputed income for the amount of the reduction. In other words, any debt forgiven is considered income, and can be reported to the IRS through a 1099 (ie: You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.).
There are exceptions. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence, debts discharged through bankruptcy, and debts discharged while you are insolvent. You are insolvent when your total debts are more than the fair market value of your total assets. Each situation is different and you should seek the advice of a competent tax advisor.
Question 6: Why should I not just walk away and let the bank take the home?
A foreclosure can be one of the worst things you can have on your credit. The banks can still sue you for the deficiency on your home. Further, current lending guidelines provide that a borrower will not qualify for the purchase of a new home in the future for up to seven (7) years after the foreclosure.
| Derogatory Event |
FHA[2] |
Conventional[3] |
Conventional with Extenuating Circumstances[4] |
| Chapter 7 Bankruptcy | 2 years from discharge | 4 years | 2 years |
| Chapter 13 Bankruptcy | 1 year |
|
|
| Multiple Bankruptcy Filings | n/a | 5 years if more than one filing within the past 7 years | 3 years from the most recent discharge or dismissal date |
| Foreclosure | 3 years | 7 years | Minimum of 3 years, but up to 7 years |
| Deed-in-Lieu of Foreclosure | 3 years |
|
2 years – 90% maximum LTV |
| Short Sale |
|
Question 7: If I file for bankruptcy, will the foreclosure still show up on my credit report?
Any consumer reporting agency that furnishes a consumer report that contains information regarding any case involving the consumer that arises under Title 11 (bankruptcy), shall include in the report an identification of the chapter of such bankruptcy under which such case arises if provided by the source of the information.[6] Bankruptcies shall remain on an individual’s credit report for a period of 10 years[7], whereas a foreclosure is 7 years.[8]
The FTC Staff Commentary requires that in reporting a debt discharged in bankruptcy, the balance should be reported as “0″, although the report can indicate that the debt was not paid for at that time and then was discharged in bankruptcy.[9] Similarly, a consumer reporting agency may include delinquencies on debts discharged in bankruptcy consumer reports, but must accurately note the status of the debt (e.g. discharged).[10] In summary, the bank may report the foreclosure after the individual filed bankruptcy so long as it also reflects a “0″ balance due or that the debt was “discharged.”
Question 8: Should I hire a lawyer to negotiate my short-sale?
Short sales are more complicated and time consuming than an average real estate transaction. Besides the sale of the property, a short sale will involve legal and tax aspects. Short Sale Advocate has considerable experience in handling these complex real estate matters and has successfully negotiated and facilitated numerous short sales. Should you have any questions about the services we provide, please call us at 866-297-3883.
[1]Utah Code Annotated §§ 78B-2-313 and 78B-2-309
[2] U.S. Department of Housing and Urban Development (www.hud.gov)
[3] FannieMae Announcement SEL-2010-05 dated April 14, 2010
[4] “Extenuating Circumstances” are unforeseen or unavoidable events or factors that could not reasonably have been anticipated or avoided in advance (ie: death, loss of job, loss of income, medical situation, divorce, …)
[5] FannieMae Eligibility Matrix dated December 1, 2010 (www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf)
[6] 15 U.S.C. §1681c(d)(1)
[7] 15 U.S.C. §1681c(a)(1)
[8] 15 U.S.C. §1681c(c)
[9] FTC Official Staff Commentary §607 item 6 “a consumer report may include an account that was discharged in bankruptcy (as well as the bankruptcy itself), as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt.”; See also Learn v. Credit Bureau of Lancaster County, 664 F. Supp. 962 (E.D. P.A. 1987)
[10] FTC Official Staff Commentary §607 item 3F(2)
Should you have any questions about the services we provide or would like to begin working with the Short Sale Advocate, please contact us by Phone at 866-297-3883 or email at info@shortsaleadvocate.cc.