Short Sale vs. Foreclosure or “Why Bother?”

If you are facing a foreclosure and thinking, “just let it go to the bank, because I am not going to gain anything from a short sale,” then let me mention a few benefits you may not have considered. First of all, before you get to this decision be sure you have exhausted all your other options. If you need help evaluating those options talk to a realtor who is knowledgeable about loss mitigation. Once you have decided that a move is in your future, you then you should look at the short sale.

• I think one of the first things to consider is that minimizing the banks’ losses is an honorable decision to make. Even though you may feel used and abused, the current lender is probably not the sole guilty party; and doing the right thing is always in your best interest.
  

• A short sale will minimize a home owner's deficiency. The bank will net more in a short sale than by completing a foreclosure; so both parties win a little something.
  

• Both a Short Sale and a Foreclosure will generate a deficiency and credit damage. That deficiency will be your loan balance, plus every little fee the lender can tack on.  Add penalty and legal fees too! The longer it drags on, the higher the number. The longer it drags on, the more late payments the homeowner has dinging his credit.
  

• In a Foreclosure, these fees and charges are pretty much left undisputed. A homeowner gets branded with a reputation of indifference.
  

• In a Short Sale, your agent will negotiate a reduction of these charges. Your agent can ask for a written agreement from the lender waiving their right to a deficiency judgment. Note that the rules are different for the Home Equity Line of Credit. HELOC’s can live on at full value and follow the homeowner for years and years beyond the sale of the home. The lender can, and usually does, pursue what they are owed. A short sale can get it on the table and get it minimized, if not eliminated all together. If the lender does require continued payments on the HELCO debt after the home has sold it is often for a reduced amount, at a very low or no interest rate and extended payment option.
  

• Lenders will likely file a 1099-C so the homeowner now has the IRS and state taxes to satisfy. Both the foreclosure and the short sale create “Phantom Income” and create tax liabilities. However, it is my understanding that a (1099-C) from a homeowner's defaulted mortgage (on their primary residence) will NOT BE TAXABLE to the financially distressed borrower when the problem is with their primary residence. Since you may or may not fall under the protection of the Mortgage Forgiveness Debt Relief Act (HR 3648); this is definitely a question for a knowledgeable accountant or tax attorney.
  

• Credit Consequences: The most common reason people use for a homeowner to sell their home with a short sale is to “save their credit.”  Your credit cannot be saved from the damage of the late payments, but you can be saved from a foreclosure being reported.  In a negotiated short sale, the final report from the Bank will read in one of two ways:  Account Satisfied or Account settled for less than full balance. The first is much better because it implies to later creditors that the loan was paid in full. The second option is much more widely used.  Future creditors (especially mortgage lenders) will realize that since the home loan was settled without full payment the home was in default.  This will make it hard to finance a home at a good rate for about three years, assuming the rest of your credit is good standing.

• A bit of good news is that selling short can actually help you by minimizing the number of late payments recorded against you; and the fewer “lates” the better. It also shows proactive behavior.

• If the home goes through the entire foreclosure process, a foreclosure and repossession will be posted on your credit report and with the new credit standards in home lending, it will likely be four to seven years before you can finance a home again. FHA may come to the rescue at that point because FHA has loans for people with damaged credit. FHA rules are changing constantly so I recommend that you minimize the damage to your credit whenever you can.
  

• In the end, choosing to list for a short sale allows you more control of the end result. You will have more control of the timing of your exit, assuming there is enough time to complete a transaction before the trustee sale.
  

• You will continue to live in your home, probably not making payments but keeping the home safe from damage. You will show courtesy to your neighbors by taking care of lawn and upkeep. You will be able to save for your new residence and you have help with the communications with your bank. You will not be alone; your agent will be your ally.
  

• You may also have the opportunity to lease back if an investor buyer is the end owner. If the numbers make sense to an investor and if you can afford to pay the reduced rent then you may not have to move at all!

I hope this clears up some of the questions. I am not an attorney or an accountant so I recommend you satisfy yourself by asking these professionals any questions you may have regarding the ultimate damage to your credit and any future possible tax liabilities both state and federal. Also, remember that not everyone qualifies to do a short sale. You will need to interview with an agent trained in loss mitigation to help you evaluate your situation and whether or not it makes sense for you to do a short sale. The foreclosure process is relentless. Don’t wait, it takes time to list your home, find a buyer and negotiate an agreement. If you want to be able to utilize the option of a short sale then you must begin as soon as possible.

Bonnie Adamson

For more information and to find a comprehensive list of numbers for Loss Mitigators at a large number of lenders you can get a copy of my complete book at www.ATeamHomes.com.