As foreclosures have diminished, plans for resolving them have
diminished accordingly. The “Make Home Affordable” program (view at
the Make Home Affordable tip sheet) program was the “go too” loan
options during the immediate aftermath of the 2008 recession. Short sales do
still occur but with less regularity than in the recent past. The information
below provides some basic information regarding short sales.
THE SHORT SALE OPTION
represent the author’s comments)
Lenders often profer
to participate in a short sale than to seek a foreclosure. Generally, the borrower retains occupancy during the sale and the
process is less costly to the lender. There can be some borrower frustration
when they find that, in spite of their willingness to participate with the
lender, the process can be lengthy and convoluted.
It was anticipated that the Home Affordable program ( noted above) would decrease the need for short sales as
borrower would be able to arrange payment plans to allow them to remain in
their homes? Unfortunately, that hasn’t occurred for many and short sales
remain the more common method for lenders to acquire and dispose of defaulted
A “short sale” transaction is one in
which the home owner sells their home, with the consent of the lender, for
“less than is owed”. Until
recently, home owners escaped the tax consequences associated with the
“forgiven debt” associated with short sales. The 2018 tax cut
legislation reinstated the “phantom tax” that occurs. For instance,
if the lender allows the home owner to sell for $50,000 less than owed on the
mortgage, the borrower will pay taxes on the $50,000 as if it were
A BORROWER MAY HAVE TO CAREFULLY CONSIDER IF A SHORT SALE IS THE
APPROPRIATE METHOD OF LIQUIDATING A HOME ON WHICH THEY HAVE HAD TO DEFAULT ON
Lenders often suggested to borrowers that a short
sale was less damaging to their credit than undergoing a foreclosure. Since the
credit report is likely to show the participation in a short sale as having
“settled for less than owed”, lenders are likely to consider a
short sale much like having participated in a bankruptcy. The wait time before
being eligible for home financing is typically 4 years for bankruptcy and short
sale vs 7 years for foreclosure. But, tax
ramifications (noted above) may force more persons into foreclosure situations?
The next phase to
making this legislation most effective for short sale or foreclosure home
sellers would be to amend the credit scoring models in regard to how said
transactions affect the calculation of future individual credit scores. We have
yet to see reliable evidence of how the borrowers’ scores are affected.
A borrower can contact their lender directly
or contact a real estate licensee to help to arrange a short sale. Lenders are
very willing to work with Real Estate representatives so borrowers may find it
helpful to have an advocate working for them when negotiating with a lender.
In either situation,
be prepared to confront several potential hurdles. The fact that a short sale
is being considered means that the amount owed exceeds a possible sales price.
If two loans presently exist on the property (i.e.; the first loan plus an
equity line or second trust deed loan) it is likely that two different
investors now “service” the two loans. While the first mortgage holder
will likely be cooperative with your short sale request, the second mortgage
holder will most likely be literally “wiped out” and lose their
investment in any short sale. Acquiring the voluntary participation of the
secondary lender in this kind of situation can not only be
time consuming but can result in not being able to proceed at all. Complaints about the length of time it
takes to consummate a short sale are more understandable when recognizing the
position of any secondary lender.
If the borrower opts for the foreclosure route, they will
escape the time frame required to negotiate between the two lenders. In either
event, the borrower is urged to seek legal and tax advice.