Pros
Incentive Programs Available
Many lenders allow relocation incentives for completing a short sale, especially when you are still residing in the property. The government’s HAFA program offers a $3,000 incentive, Freddie Mac and Fannie Mae both offer $3,000, FHA up to $3,000, VA up to $1,500. We’ve seen up to $30,000 from Chase, Bank of America and Wells Fargo on a case-by-case basis. They do this because they know that they can recover more of their money through a short sale than by taking your property back and selling it as bank owned. We fight for these on every file!
Pay Back as Much as Possible
Because your lender avoids a full foreclosure in a short sale, they recover much more than they otherwise would. This, in-turn, reduces the amount you could potentially be liable for (and in Colorado, there is no “automatic forgiveness”). For many homeowners, a short sale is a way to payback as much as possible, without coming out-of-pocket.
Get Relief
Many Homeowners find great relief of finally getting out from the high payments and moving on with their life. Many times you can stay in the property for several months while the short sale is in process. This can allow plenty of time to plan for a new sustainable solution.
Avoid Foreclosure & Bankruptcy
By completing a short sale, the foreclosure is withdrawn and we have seen many who are able to completely avoid bankruptcy. Those who have security clearances or employment credit checks are able to avoid job disturbances that can come with foreclosure & bankruptcy. Confidentiality is a top priority for us. Always consult with an attorney.
Bounce Back
A short sale is typically looked at a positive, proactive approach and lender try to reward that. Not only are there incentives at close but in the future as well. Fannie Mae states that if you go through foreclosure and they back the loan, you cannot get a new Fannie Mae backed loan for 5 years but if you go through a short sale on a Fannie Mae loan, they’ll loan to you again in 2 years. Our blog post about future borrowing guidelines here: http://rockymountainshortsales.com/short-sale-credit-impact
Cons
Credit Score
The most common negative marks on your credit will be the 30-60-90-120 day late mortgage payments and your credit score will show that.
Sadly, there is not a big difference on the impact of your credit score on a foreclosure vs. a short sale since the largest damage occurs when 1) you become 90-120 days late, 2) the foreclosure being filed in the county records and 3) a file is in collections.
Future borrowing should be better with a short sale. See the “Pro” above.
Taxes – You May Receive a 1099 for the Loss
When you lender write the loss off on their taxes as a business loss, but they must report it to the IRS and send you a 1099-C for the amount of the loss. IRS says that because you technically received the benefit of the money, and you did not have to pay it back, they treat it as ordinary income that you need to pay tax on. However, if you can show insolvency on IRS Form 982 you may be released from paying the tax. In all cases you need to consult with your financial advisor or accountant about the tax consequences of foreclosure. We are neither.
Deficiency Judgments
The lender may not accept the amount they receive as a full settlement of your debt. They have the right in Colorado to pursue you for the difference between the amounts they recover (regardless whether short sale or foreclosure) vs. how much they are owed.
Most lenders are more forgiving if the short sale is your primary residence. Fannie Mae & Freddie Mac have publicly stated that they will not pursue primary homeowners for deficiency judgments. We’ve found that 2nd mortgages are the most likely to chase you for amounts owed. Contact our office today to learn our recent experiences with your particular lender(s).
We have seen that they may:
• Ask you to sign a new “soft” promissory note for all or part of the deficiency as a condition for them agreeing to the short payoff. These notes are often 0% interest and payable over 3 – 5 years.
• Ask for a small contribution towards their loss at closing. This depends on the size of the loss and your financial situation. The more they see you have, the more they’ll ask for. Typically this amount is about $1000 – $8000 and is an alternative to a promissory note (above).
• Sell this debt (the deficiency amount) to a collection agency or attorney who may pursue collection efforts, get a court judgment against you and garnish your wages or assets. We have found this extremely uncommon and only if they believe you have real assets.
• Do nothing. After absorbing a big loss, sometimes lenders do not want to spend another minute dealing with it.
One of the main reasons we advocate short sales is because the lenders receive more money through a short sale than by taking your house back and reselling it. This in turn generally creates a smaller shortfall that you could potentially be liable for.
Get Help Now
Time is crucial. The longer you wait, the more difficult it is for us to help you. We are in touch with a network of brokers throughout Colorado who can get started right away. When you are in or heading towards foreclosure our available options diminish or even disappear with each passing day. Because each situation is so unique, we cannot predict what your best solution will be. Know that we are very creative, persistent and our recommendation to you is designed to solve YOUR problem.
