SHORT SALES - HOW WILL IT AFFECT ME NOW AND IN THE FUTURE?
If you are a current homeowner living in an area where there are many “Short Sale” home sales occurring (and foreclosures) this is certainly affecting the value of your Real Estate. The lien holders on a “Short Sale” are agreeing to allow the owners to sell their home for less than what is owed and in many cases for less than current market value. This then drives the market value lower and lower. Until the Foreclosure Sales and Short Sales taper off this is going to continue. Even if a buyer is willing to pay top dollar for a home in your neighborhood, if they are financing the property the appraiser is now struggling to find comparables to justify the price the buyer is willing to pay. If the appraised value falls short of the negotiated sales price the buyer may not be able to procure the loan which forces the seller to re-evaluate his negotiated price to determine whether to sell in today’s market.
If you are a current homeowner that has made the decision to sell your Real Estate in a “Short Sale” scenario here are some things you will want to investigate thoroughly. What is my future debt responsibility? What are my tax implications? How will this affect my credit now and in the future? The internet is truly a gift when it comes to finding answers; let’s look at the credit issue. Based on data compiled by Fair Isaac Corp., which developed FICO scores, and VantageScore, the scoring model used by three of the major credit bureaus – Experian, TransUnion and Equifax - if a lower sales price than outstanding balance was negotiated (Short Sale), but a delinquency was reported it would affect the credit approximately 50-140 points; there will also be an impact on the score depending how many late or non-payments were reported prior to the close of escrow. You could possibly turn around and be able to purchase in as little as 12-18 months (a Fannie Mae or Freddie Mac backed loan is a minimum of 2 years). If the home is foreclosed on the damage is a bit more severe and would affect the credit approximately 150-300 points plus damage of the late or non-payment history already reported. Typically this will affect your purchase power for a minimum of 3 years.
The Distressed Property Institute, LLC reports that Credit History on a Foreclosure will remain as a public record on a person’s credit history for 7 years or more. A Short Sale is not reported on a person’s credit history. There is no specific reporting item for “short sale”. In most cases a loan is typically reported “paid in full, settled” or “paid as negotiated”. For more information on Foreclosure vs. Short Sale regarding future loan potential, credit score, credit history, security clearances, current employment and future employment visit the Certified Distressed Property Expert at www.cdpe.com.
If you own property in the state of Arizona there may be some laws (Anti-Deficiency Law) to protect you against a future deficiency judgment if you lose your home to foreclosure. These same laws may not protect you in a “Short Sale” transaction. It is very important to read thoroughly your Bank/Lender issued “Short Sale Approval Letter” and understand it. In many successful short sales it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner. This is where an attorney may help protect you and your best interests.
If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are some facts from the Internal Revenue Service. Visit IRS.gov and search IRS Tax Tip 2010-44 for all Ten Facts about Mortgage and Debt Forgiveness. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions, such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed. This form should be examined carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7. Another good resource is IRS Publication 4681, also available at IRS.gov. It is recommended that a CPA or tax advisor be consulted to help protect you and your interests.
There are many options for you to know about prior to making a decision on how you want to handle your situation. Short Sale, Foreclosure, Deed in Lieu, Refinance, Loan Modification, Servicemembers Civil Relief Act (SCRA), Reinstatement, Forbearance or Repayment Plan, Rent or Sell the Property are among the many alternatives available. To make an educated decision you will want to consult with a real estate professional with experience regarding the mentioned options above; along with a real estate attorney and your tax advisor.