What is a Foreclosure?

As a result of the Homeowner not being able to make their mortgage payments, the Lender takes action to seize the property.  Basically, the Homeowner borrowed money from the Lender, using the house as collateral.  There is an agreement that if the Homeowner does not maintain payments, then the Lender could take the house.

What is a Short Sale?

A Short Sale is when the Lender will accept less than the full amount due on a mortgage when a property is sold.  Usually, the Lender will accept the Short Sale to avoid the time and expense of a Foreclosure.  Financially the Lender is actually ahead after a Short Sale versus a Foreclosure.

A successful Short Sale will eliminate a Deficiency Judgment, minimize your tax liability and keep the Foreclosure off your record. 

Why would the Lender want to allow a Short Sale on the property?

The reason is simple.  A Short Sale often has a better return on investment to the lender than a foreclosure.  The savings a lender sees from a Short Sale compared with a foreclosure are substantial.  Not only does the lender receive this savings, they are also paid on the loan 6 months earlier than in the foreclosure process.  This allows them to collect and cash-out earlier than they would in a foreclosure.  Plus, lenders spend a great deal of money with attorneys to complete the foreclosure process.  Lenders created the Short Sale process as a foreclosure alternative for these reasons.  The incentives to perform a Short Sale on your property are in place to motivate you to participate. 

Additional reasons for the Lender to accept a Short Sale:

• Legal Concerns

Lenders have come under legal pressure to work with borrowers to equitably resolve situations where borrowers are unable to meet their mortgage obligation, particularly when the borrower makes an effort to arrive at a compromise solution.

• Wall Street

Wall Street is watching Lenders rely heavily on their ability to package and sell bundles of loans on the secondary mortgage market. They need to sell these bundles of loans in order to put the funds back to work by loaning the money again and collect loan fees along the way. If mortgages perform poorly after they are sold it could impact the lender's ability to sell their loans on the secondary market. A successful short sale gets the loan payoff resolved quickly.

• Asset Management Expenses

If a lender acquires a property through foreclosure, the property will be managed until it is repaired and resold. It is expensive to manage real property assets - homes – spread throughout the region, the state and possibly even the nation. Keeping properties maintained, keeping utilities on, making repairs and the administrative costs attached to these activities are all costs the lender would prefer to avoid. A successful short sale eliminates most of these costs.

• Reserve Requirement

Delinquent and non-performing loans place another burden on mortgage lenders. For all delinquent and non-performing loans lenders must set aside funds in reserve to deal with potential losses. These funds cannot be put to work generating new loan fees until the bad loans are resolved. A successful short sale lets the lender put their money back to work.

 

What is a Deficiency Judgment?

A Deficiency Judgment can arise if the bank sells the house for less than the mortgage debt.  Thereby, lenders can hold the you responsible for the unpaid portion of the loan.  This can result from a Short Sale or a Foreclosure Property.  The Lender may be allowed to take further legal action.  Some states have restricitons and regulations on deficiency judgments, but unfortunately the majority do not. 

The majority of Lenders will not choose the deficiency judgment option and choose to write off the loan.  If they choose to pursue a deficiency judgment on the balance owed, the amount can normally be settled for pennies on the dollar.

EAG & Associates always seeks a full release of any lien and request that the debt be considered settled.   

Is the Seller going to get hit with a tax bill or a 1099 if you do a Short Sale?

Upon successfully closing a Short Sale, lenders will always report a loss to the IRS and issue a 1099.  However, the Mortgage Forgiveness Act of 2007 was signed into law on 12-20-07 and is now official, effectively getting rid of the question "will I be taxed on the Short Sale".  Prior to this Act, forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure, was potentially taxable income to the borrower.

This was the subject of much media attention and led to many questions and concerns from Sellers wondering whether or not they were going to get “hit with taxes” on the Short Sale.
The new law, however, temporarily waives these taxes for debts forgiven (as high as 35%) from the beginning of 2007 to the end of 2009.

This will effectively put an end to the question from Sellers... will I be taxed on the Short Sale discount of my primary residence.  The definitive answer (at least until the end of 2009) is NO!

For a copy of the Mortgage Forgiveness Debt Relief Act of 2007, go to:  http://www.whitehouse.gov/news/releases/2007/12/20071220-6.html

Will a Homeowner's credit be affected?

If the Homeowner has to Short Sale their home they’ve most likely missed payments already.  That in and of itself has already adversely affected the Homeowner's credit.  The key here is to stop the devastating affect on your credit that a Foreclosure causes.  A Foreclosure is the most damaging record on your credit report – its even worse than bankruptcy.

By working with EAG & Associates you give yourself a fighting chance of avoiding Foreclosure and start towards the “Rebuilding” process. With our help, your credit will recover quickly if you keep your other lines of credit in good standing. With EAG & Associates you have an experienced team of professionals that will help you through these tough times.

How does a Foreclosure and a Short Sale show up on my Credit Report?

A credit bureau is the only true source of information for determining how a Foreclosure and a Short Sale is going to affect your credit.  Therefore, we are not attempting to provide any form of legal advice.

However, from our experience with Homeowners,  Foreclosures usually show up as FORECLOSURE and can stay on your credit report for seven years.  A Short Sale is commonly listed as SETTLED DEBT.

Please consult a credit bureau for how a Short Sale and a Foreclousre will actually affect your credit.

Is a Short Sale right for me and my situation?

Lenders are increasingly willing to work with borrowers faced with a financial hardship to accept a discounted payoff on a mortgage.  If you are faced with a hardship, and are unable to meet your obligation on your mortgage, the Lender would prefer to settle the matter with you as opposed to taking the property through Foreclosure.

As you consider the option of pursuing a Short Sale, remember your Lender is looking to limit any potential loss on your loan.  By completing a Short Sale, your Lender has arrived at a solution that is, for them, much better than a costly Foreclosure.

What sort of hardship would a Lender consider legitimate?

To some extent, that will depend upon the mortgage company considering the Short Sale request. Generally, as long as the hardship is real and the mortgage company believes the loan is likely to become delinquent as a result, the Short Sale request will be processed by the Loss Mitigation Department.  A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter.  The hardship letter sets the tone for the entire file.

Acceptable Homeowner Hardships