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The truth about short sales and foreclosures
Homeowners are increasingly finding themselves in situations where they owe more on their home than they can sell it for in today’s market. So, what’s a homeowner to do? The options include keeping the home, allowing it to go to foreclosure or trying to do a “short sale.”
With a short sale, owners can attempt to negotiate with the bank to forgive the difference between the net sales proceeds and the balance of a loan, but that is not easy. You must provide a great deal of information to prove that you can no longer afford your payments, nor can you afford to pay the difference at closing.
This can take a really long time.
Your chances of getting this approved are better if you have only one lender, and if you have had a change in circumstances that led to the situation (like a forced relocation, divorce, job loss, etc.). You can also offer to pay the difference to the bank with an unsecured note, and the bank will look more favorably on that.
But there are a few things every homeowner should know before they attempt a short sale and/or allow their home to go to foreclosure.
Either way, your credit will be significantly tarnished. Most lenders will not consider loaning money to you again for quite some time. Eventually, when you’ve re-established enough credit that they will consider you for a home loan again, you’ll probably have to contribute a cash down payment of at least 20 percent of the home value.
Lenders are pooling “bad debts” (any amount they do not recover) and selling them to companies that will attempt to collect on those outstanding debts with judgments and other collection options, unless you’ve negotiated otherwise with the bank during a short sale agreement.
Any amount that is “forgiven” may be considered taxable income for you, so you should check with an attorney or tax adviser who is familiar with the Debt Forgiveness Act to find out if this should be a concern for you.
Probably the scariest reality of all is this: Consumers are now being prosecuted for loan fraud in cases where they’ve defaulted on the loan.
Whether your home is lost in foreclosure or you negotiate a short sale, if you fudged the truth about your income or assets when you got the loan, or other relevant information, you could be at risk for this. You should seek legal advice before contacting your bank or a real estate agent to attempt a short sale.
The best way to avoid all of these terrible consequences is to figure out how to keep the home and keep your mortgage payments up to date. But if you’ve truly had an unforeseeable event that leaves you no other options, there are trustworthy resources available to you, and a short sale is usually a better option than foreclosure because you have the opportunity to negotiate terms.
Vicky Chrisner is a real estate consultant at Keller Williams Realty in Leesburg. She can be reached by phone at 703-669-3142 or online at www.vickychrisner.com.
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