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Q & A on Short Sales | Part 2
Continuing our mini series on Short Sales, I will now explain how a short sale will affect one’s credit among other topics.
How will a Short Sale affect my credit? 
- A short sale will drastically affect your credit score similar to that of a foreclosure.
- Expect a 200 to 300 point hit in your FICO. However, in most cases there is much less of a point reduction in your FICO in a short sale. A lot of this has to do with the amount of negative reporting history recorded by the lender.
- There is usually a lot less negative history reported in a short sale because the property is sold before the foreclosure.
- The key to retaining the most points in your score is to settle all bad debts and negative reporting activity as soon as possible.
What is the advantage of a short sale as opposed to foreclosure?
- The advantage to a short sale is that it usually does not cost you any money and the lender pays for all the real estate fees and closing costs.
- Your FICO score might not be affected as badly in a short sale.
- You will also be eligible by Fannie Mae guidelines to qualify for a loan at a reasonable rate after 24 months where it could take 5 to 7 years with a foreclosure.
How does a short sale work?
- A real estate agent will list your property subject to the lender’s acceptance of the deficiency or loss.
- They will obtain the highest possible price for the property and submit everything with the short sale package to the lender. You will be able to live in the property during the short sale process.
- It is extremely important to hire an agent that has short sale experience and who is very knowledgeable on short sales and negotiations with the lenders.
- Because property owners cannot by law receive any compensation in a short sale, they tend to use anyone to facilitate this process.
- The short sale is only an advantage if it is done successfully and as quickly as possible. Only use someone who is going to have the best possible chance of getting the short sale approved.
Short sales on investment and income properties?
- Since the 2007 Debt Forgiveness Act does not apply here, it is extremely important to hire a professional to represent the short sale.
- It is in the property owner’s best interest to obtain the highest possible amount for the property. If you are going to be 1099 on the loss, you want to make sure the loss is as little as possible.
- It is also important for the agent that represents you to try and negotiate the release of a deficiency judgment, where the lender sues you for the deficiency or loss.
*** It is best and highly advised, to contact your CPA to get all the information for your particular case and tax liability and filing information.
If you have any further questions on short sales, contact our office at 714.283.6649.
Q & A on Short Sales | Part 1
There are a lot of homeowners out there who are underwater, and they just don’t know what to do but wait to hear about their loan modification. Being a Realtor, I’m often asked by homeowners regarding their their options and what they can do. So I decided to shed some light on the situation and help out those homeowners who are in need.
The Pitfalls to loan modification? (Loan Modification or Short Sale?)
Getting a loan modification can be the best possible solution to a financial hardship, but could also potentially be the worst. A loan modification is only the BEST solution if the outcome resolves your financial woes and is permanent. If not, it becomes a band-aid to a wound that won’t ever heal and will become much worse.
- For Example, the 2007 Mortgage Forgiveness Debt Relief Act passed by the Bush Administration in 2007 expires at the end of 2012.
- This bill forgives the property owner’s losses on their principle residence for federal income tax purposes.
- Outside of this bill, the property owner would be 1099 on the loss that the lender incurred and taxed as income.
- This could amount to an unbelievably large tax bill that could take years and years for the typical family to be able to pay off.
- Therefore by agreeing to a temporary modification which keeps you in the home for the next five or so years, you would eliminate yourself from the umbrella of this policy. If you owe $500,000 and the property sells for $300,000 then you would be 1099 and taxed on $200,000 of income. ***
- If you cannot obtain a permanent worthwhile loan modification, your best bet is to pursue a short sale.
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What is a short sale?
A short sale is not a term that refers to the time frame of the sale but to the deficiency or loss on the loan. The lender accepts the loss on the difference of what is owed and what the current market will bring.
- In a short sale, the property owner is underwater and owes more on the property than it is worth. In most cases, an agent will sell the property at current value and negotiate with the lender to accept a loss at no cost to the property owner.
What is the Cost to do a short sale?
In most cases, short sale costs are absolutely free to the property owner as the lender will incur all the fees and costs.
What are the tax consequences of a short sale?
- The 2007 Mortgage Forgiveness Debt Relief Act forgives losses on principle residences for Federal tax purposes.
- The state act has since expired and as of right now state tax will be owed. The federal act does not cover investment properties, second homes and income property.
- On April 12, 2010 the California State Senate passed Senate Bill 401 that exempts distressed homeowners from state income tax liability with the short sell, foreclosure or loan modification on their home.
- It is very important in all cases to contact a CPA or tax attorney to find out what your tax liabilities are.
Stay tuned for the 2nd part of my short sale series to find out the advantages of the short sale, how it works, and how it can affect your credit score. You can also contact our office for more information at 714.283.6649.
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