VIEWS: 1 PAGES: 7 POSTED ON: 10/27/2011
Is A Short Sale Right For You? Answers To Your Short Sale Questions Short Sale Benefits Here are a few benefits for doing a short sale that may not have occurred to you: • You are in control of the sale, not the bank. • You may sleep better at night knowing who is buying your home. • You will spare yourself the social stigma of the "F" word, foreclosure. • Contrary to popular belief, you can be current on your payments and still effect a short sale. • Your home sale will be handled like any other home sale. Buying Again After a Short Sale If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. The wait for an FHA Loan is 3 years. If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence. Buying Again After a Foreclosure With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years. If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years. Affects on Credit After a Short Sale A short sale is not a derogatory mark on your credit because credit bureaus do not show the word "short sale" on your credit report. It may say "pay as agreed" or "paid as less than agreed," among other categories. Some clients have reported negative FICO scores drops from 50 points to 130 points. The point drop is typically due to being in default, that is behind on your payments. Affects on Credit After a Foreclosure A number of sources have reported FICO score drops from 200 to 400 points after a foreclosure. Generally this credit score will remain on your credit report as a public record for 10 years. Credit Reports After a Short Sale All lenders report short sales differently and some do not report them to the credit bureaus at all. Credit Reports After a Foreclosure If a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record. Deficiency Judgments After a Short Sale Judgments are often negotiated between the seller and the short sale bank. In some cases, such as California, if the home is your personal residence and was financed through purchase money, there is no Deficiency Judgment. Deficiency Judgments After a Foreclosure Banks are unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, according to the California Association of REALTORS, a deficiency judgment may be filed if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee's sale. Loan Application Questions After a Short Sale Loan applications do not ask questions about a short sale. You may report that you sold your home. Loan Application Questions After a Foreclosure You are required to answer the question: "Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years." If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud. Length of Time to Move After a Short Sale If you've had a foreclosure notice filed, you may be able to postpone that action while the bank considers your short sale. The wait for short sale approval can be from 2 to 3 months, or longer. Length of Time to Move After a Foreclosure Unless prior arrangements have been made, the bank may want you to immediately vacate the property and can commence eviction proceedings. Taxation After a Short Sale A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions. Taxation After a Foreclosure Same as with a short sale. Except some lenders immediately send out 1099s, even if the owner is exempt. Contrary to what people think, deficiency judgments stem from the fact a borrower defaulted on a promissory note, not the mortgage. A promissory note is a promise to pay. It can also provide for personal liability, depending on your state laws. Personal liability means the lender can come after your assets if you do not make your payments. A promissory note is secured by either a trust deed or a mortgage, depending on the financing instrument each state uses. Typically, the mortgage or trust deed is recorded in the public records where the property is located, which gives the public constructive notice that the home has a lien against it. Foreclosure If the promissory note is not paid as agreed, the beneficiary has the right to foreclose upon the property, because the property is the security for the promissory note. If the borrower does not bring the payments current or pay off the existing loan(s) during the foreclosure period, the home will go to auction. If the home sells for more than the amount that is owed, there is no deficiency; however, that rarely happens. Generally it sells for less. Banks get the home in foreclosure when nobody bids enough to pay off the bank. The bank also has a right to sell the home for less to the highest bidder at the auction, but generally banks prefer to sell to a private party after the foreclosure, hoping to get more money on the open market. Short Sales While the home is pending foreclosure proceedings, sometimes banks will agree to cut their losses. They do a short sale by accepting less than the amount that is owed. The home seller hires a real estate agent to find a buyer for the short sale. The buyer makes an offer and, if the bank accepts it, the home is sold at a loss to the bank. Deficiency Judgments A deficiency is the difference between the fair market value of the property and the amount received, providing the amount received is less than the amount owed. Whether the bank can pursue a deficiency judgment after a foreclosure or short sale depends in part on whether the promissory note makes the seller personally liable for the debt. Some states allow for personal liability. Deficiency Judgments in Washington The good news for Washington borrowers is all purchase-money loans on a one- to four-unit residential dwelling are exempt from deficiency judgments. Refinance loans in Washington -- loans taken out after the home was purchased through a refinance or second mortgage -- can be subject to a deficiency judgment under the following conditions: • The lender forecloses under judicial proceedings Most lenders foreclose through a trustee's sale; however, which does not give the lender the right to pursue a deficiency judgment, with one exception (see second hard-money second mortgages below). • A three-month time limit applies to actions for deficiency judgments under a judicial foreclosure. • If the second mortgage is hard money and the lender has lost security for that loan through a foreclosure or short sale -- making the security for the promissory note worth nothing -- the beneficiary of that second mortgage can pursue a deficiency judgment (Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35 (1963). Negotiating Collection Some hard-money lenders sell the promissory note to an investor after a foreclosure for pennies on the dollar. Then, the investor will attempt to collect the debt. Even though a lender may have accepted, say, $1,000 for a $100,000 second mortgage through a short sale, the security for that hard-money second is released but the promissory note may not be. A short sale seller such as our reader might believe the ordeal is over, until one day he receives a phone call, asking for repayment. • Realize that the lender most likely will negotiate for a discounted payoff. • The lender may ask for a new promissory note to replace the old promissory note. In that event, make sure the lender sends a "paid in full" promissory note. • If the lender has already sold the note, the discount may be greater. • Not all hard-money promissory notes must be paid in cash. Some lenders will accept payments. • If the lender directs payments to another entity, realize that the note may have been sold at less than its face value, and that new lender may accept an even lower amount as payment in full. • After the note is paid in its entirety, ask the lender to return the promissory note marked "paid in full."
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