Real Estate Partner Prudential NW Tells It Like It Is: Before Proceeding With A Short Sale
In a previous article regarding Short Sales – Seller Advisory we addressed what a short sale is, as indicated from The Washington Realtor Association. Below are tips and resources to help determine if proceeding with a short sale is the best option.
From the desk of Lori Alden, Managing Broker of PNW in Burien, serving all of South King County, comes this advice and list of helpful websites to check into before you sell your house in a short sale.
Understand a Lender’s creditors Options upon Loan Default
There are many types of liens and other obligations that are secured by real estate. These may be purchase loans, refinance loans, home equity lines of credit, contractor liens, IRS tax liens, DSHS liens for unpaid child support, or other obligations. The type of debt and type of property will determine what remedies a lender may have if you fail to make the required payments.
The lender’s policies regarding forgiveness of debt, the tax consequences, your overall current or potential future financial strength, the lender’s willingness and procedure for processing a short sale request, and the number and nature of other recorded encumbrances (second mortgages for example) on the property are some of the many factors a seller should consider in deciding whether to pursue a short sale.
Be Aware of Predatory “Rescue” Scams & Short Sale Fraud
Homeowners worried about foreclosure may be susceptible to predatory “rescue” scams which may cost money with no results, result in the loss of the home entirely, or involve the seller in a fraudulent scheme. For more info, view this PDF.
“Red Flags” of fraudulent schemes include:
- Guarantees to stop the foreclosure
- A promise that you can buy the house back or stay in the house following transfer of title
- Upfront fees
- Instructions not to contact the lender
- Transfer of title or lease of the property
- Requests that the homeowner execute a power of attorney
Report suspected scams to the Department of Financial Institutions or 1-877-RINGDFI (746-4334).
Contact a Free HUD-Approved Housing Counselor or Contact Your Lender Directly
Contact a HUD-approved housing counseling agency online or call (800) 569-4287 or TDD (800) 877-8339 for advice on your options. Additional HUD resources.
Contact the Neighborhood Assistance Corporation of America.
Try contacting the lender directly. To find the lender’s contact information, check the loan billing statement, or coupon book. Ask for the lender’s home retention department, loss mitigation department, (or other department that handles negotiation of loans in default); explain the situation and find out if the lender is willing to discuss options.
Utilize Free Services Available to Washington Residents
Non profit counseling to try to avoid foreclosure: 1-877-894-HOME (4663). If legal advice is needed, callers will be referred to a pro bono attorney through the Washington State Bar Association.
More help and resources are available at www.WAHomeowners.com.
Obtain Legal Advice
An attorney can advise you about your options and legal liability. You may be able to receive free or reduced fee legal assistance from one of these sources:
- Northwest Justice Project (206) 464-1519 or 1-888-201-1012;
- Your county’s local Bar Association
Obtain Tax Advice
For Mortgage Forgiveness Debt Relief Act and Debt Cancellation tax information, see this IRS article.
Be Aware of the Consequences of Committing “Waste”
Damaging the property or removing fixtures such as sinks, toilets, cabinets, air conditioners, and water heaters may result in liability to the lender for “waste.” In other words, the lender may be able to sue you for damages if you have physically abused, damaged or destroyed any part of the property.
Short Sale Considerations
FIRST, Understand that a Short Sale May not Discharge the Debt. You should know whether you will still owe your lender money (a deficiency) after the short sale. You should know this BEFORE you close the sale of your home.
Even if a lender agrees to a short sale, the lender and any junior lien holders may not agree to forgive the debt entirely and may require you to pay the difference as a personal obligation. This outstanding personal obligation could result in a subsequent collection action against you. For example, a lender may accept the short sale purchase price to “release the lien” on the property but still require you to pay the full amount of the original debt.
You must be certain of the terms of any short sale before making a decision. All agreements between you and the lender must be in writing. Consult an attorney regarding whether the lender is entitled to pursue collection of any deficiency. Obtain any debt forgiveness agreements with the lender in writing but be aware that the language used in these agreements can be extremely confusing and even misleading. Seek the advice of legal counsel before accepting the lender’s terms.
SECOND, Understand that a short sale may result in a higher tax debt
A short sale in which the debt is forgiven is considered a relief of debt and may be treated as income for tax purposes. The Mortgage Forgiveness Debt Relief Act of 2007 created a limited exemption to allow homeowners to pay no taxes on debt forgiveness; however, only cancelled debt used to buy, build or improve a principal residence or refinance debt incurred for those purposes qualifies for this tax exemption. For more information on the tax consequences of debt relief, seek professional tax advice and go to www.irs.gov and conduct a search regarding the Tax Relief Act.
If you decide to pursue a short sale, understand that the process will likely take several months or more to complete. Consider taking the following actions.
Contact a Qualified Real Estate Professional
Prudential Northwest Realty is here to help. If you or someone you know is looking for a trusted professional, please contact Lori Alden at 206-244-6400 to match your needs with a licensed Broker who specializes in short sales.
Investigate Documentation and Eligibility
Documentation and eligibility criteria for short sales vary depending on specific lender and investor guidelines. Generally, you must prove that you are financially incapable of paying the loan. The lender will consider this when determining the costs of accepting the short sale versus foreclosing.
You will have to document your financial situation. If you have funds to pay the deficiency, a lender will not necessarily allow a short sale. However, some lenders will not require you to dip into retirement accounts to fund the deficiency. These issues will have to be negotiated with your lender.
Determine the Amount Owed on the Property
All debt and costs must be factored in before a lender can determine whether a short sale is more economical for them. The analysis will include the delinquent loan, all other recorded debt (past due homeowner’s association fees, unpaid property taxes), and the costs of a sale (closing costs, brokerage commissions, and necessary repairs). If you have more than one loan on the property, a short sale will require the approval of all lenders.
Determine the Estimated Fair Market Value of the Property
You must prove to the lender that the home is worth less than the unpaid loan balance plus closing costs. Consult a real estate professional or an appraiser for assistance in estimating the value of the property.
Consult Legal Counsel
Legal counsel can help you determine whether a short sale is the best option and can advise you during the short sale process. A short sale is a complex transaction.
Be Aware of the Impact on Your Credit Score
The impact of a short sale on your credit score depends upon a variety of factors, including late or missed payments. A short sale may appear on your credit report as “pre-foreclosure redemption,” “paid in full for less than full balance” or other similar term.
It is possible that a short sale will have a different impact on your credit than a foreclosure or deed in lieu of foreclosure (or any other outcome). But, beware that once you miss mortgage payments, your credit rating will be severely impacted. Some lenders will tell you that they will not consider you as a short sale candidate unless you are behind on payments. Do not intentionally withhold mortgage payments, solely for short sale consideration, without first consulting legal counsel.
Understand There May Be a Waiting Period Before You Can Buy another Home
Your ability to qualify for a loan to purchase another home after a short sale will likely be impacted because of the impact on your credit score. It may be some time before a lender will loan you the money to purchase another home.
Home Affordable Foreclosure Alternative (HAFA) Program
The HAFA program was designed to give homeowners alternatives to a foreclosure, which include incentives for completing a short sale. If your home sale can close as a HAFA transaction, you will emerge owing no deficiency. However, it can be very difficult to qualify as a HAFA transaction. For more information on the options available, visit the HAFA program website.
Read this article to determine if you are eligible.
To find out if your mortgage servicer participates in the HAFA program see this page.
For more information, visit: The Washington Department of Financial Institutions website.
Next article: Options Other Than Short Sale
(Prudential Northwest Realty is here to help with all your real estate needs. If you or someone you know is looking for a trusted professional, please contact Lori Alden at 206-244-6400 to match your needs with a licensed professional.)
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