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The truth about short sales and foreclosures
Homeowners are increasingly finding themselves in situations where they owe more on their house than it's worth in today’s market. What’s a homeowner to do? The options include keeping the house, allowing it to go to foreclosure or pursuing a “short sale.”
With a short sale, owners can try to negotiate with the bank to forgive the difference between the net sales proceeds and the balance of a loan – but that is not easy. The homeowner must provide a great deal of information to prove that he or she can no longer afford the payments or afford to pay the difference at closing. This can take a long time.
The chances of getting a short sale approved are better if the owner has only one lender, and if a change in circumstances has led to the situation (for example, a forced relocation, a divorce or a job loss). The owner can also offer to pay the difference to the bank with an unsecured note; the bank will look more favorably on that.
But, there are a few things homeowners should know before they attempt a short sale or allow their home to go to foreclosure.
Either way, the owner's credit will be significantly tarnished. Most lenders will not consider loaning money again for quite some time. Eventually, when the owner has re-established enough credit that a lender will again consider a home loan, he or she will probably have to contribute a cash down payment of at least 20 percent of the home value.
Lenders are pooling bad debts (any amount they do not recover) and selling them to companies that will attempt to collect on those outstanding debts. The companies will use judgments and other collection options unless the owner has negotiated with the bank during a short sale agreement.
Any amount that is “forgiven” may be considered taxable income, so homeowners should check with an attorney or tax adviser who is familiar with the Debt Forgiveness Act.
Probably the scariest reality is this: Consumers are now being prosecuted for loan fraud in cases where they’ve defaulted on their loan. Whether the home is lost in foreclosure or a short sale is negotiated, if the owner fudged the truth about income, assets or other relevant information, he or she may be prosecuted. Homeowners should seek legal advice before contacting a bank or real estate agent to attempt a short sale.
The best way to avoid all these consequences is to figure out how to hold onto the home and keep mortgage payments up to date. But, if an unforeseeable event has truly left a homeowner with no other options, trustworthy resources are available. A short sale is usually a better option than foreclosure because it allows for the opportunity to negotiate terms.
Vicky Chrisner, a real estate consultant at Keller Williams Realty in Leesburg, can reached at 703-669-3142. Her Web site is www.VickyChrisner.com.
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