What You Need To Know About
“Short Sales”:
FACT: If you ever wanted to buy a house... and if you missed the boat (luckily) in the 2000-2005 market rush... NOW IS THE TIME! Yes, qualifying is tougher (thank God) than when they were giving money away, but if you have a decent job and credit, you can get a loan. And money is cheap now at 4.5%. Read this so you know more than the next guy, when folks start talking about "stealing a short sale."
Tax issue: A short sale is where the lender agrees to sale
the distressed property for less than the borrower owes on the mortgage. Since the
lender accepts the short sale net proceeds as full satisfaction of the
mortgage, the borrower is “forgiven” the difference between what was owed on
the mortgage and the net proceeds of the short sale. That difference will be
considered income by the IRS and taxed accordingly, unless an exception
applies.
Under the Mortgage Forgiveness Debt Relief Act
(2007), taxpayers who were forgiven part of their mortgage on their primary
residence can likely avoid tax liability by including Form 982 with their tax return.
See IRS Form 982 instructions for full explanation of qualifying criteria.
Effect on Credit Rating: Contrary to
popular belief, the effect of a short sale on the homeowner’s credit is
virtually identical to that of a foreclosure—a dip of 200 to 300 points. There
is a notable difference, however. The owner who goes through a short sale may
qualify to purchase a subsequent home in less time than someone who goes
through a foreclosure. The waiting period after a foreclosure is 24 - 72
months, whereas the wait after a short sale is about 24 months. Also, in the
case of a short sale, there may be fewer months of non-payment on the mortgage,
which will result in less damage to the homeowner’s credit score.
A “deed in lieu (of foreclosure)”… where the borrower
merely signs the property back to the bank, brings a credit effect roughly
“somewhere in between” a foreclosure and a short sale.
Deficiency Judgment/Future
Liability: Where a home is sold for less than what is
owed on the mortgage, there is the potential that the borrower will be liable
for the deficient amount. In the case of virtually all Florida
foreclosures, the lender is entitled to petition for a deficiency judgment if
the sale of the home does not cover the balance due on the mortgage. Since
foreclosure in Florida is a
judicial process, the lender is already obligated to pay attorney fees and
court costs. As a result, the lender may choose to request a deficiency
judgment unless the discrepancy is relatively minimal.
In the case of a short sale,
the matter is not nearly as clear: Whether the lender is entitled
to a deficiency judgment may depend upon the terms negotiated with the
borrower. In some cases, the lender will waive its right to a deficiency
judgment in exchange for the borrower’s cooperation. If the lender does not
waive this entitlement, whether it seeks a deficiency judgment or not will be a
business decision based on the amount of the deficiency, costs of litigation,
etc.
When attempting to purchase a short sale listed
property, remember that you are not negotiating with the seller… you are merely
a spectator to the seller’s negotiation with the mortgage holder. Not always the bad guy, the bank wants value,
as they are owed a just debt.
Frank Zedar, Direct: 386-931-1987
Broker Associate, CDPE (Certified Distressed Property Expert)
ParkSide Realty Group, LLC, Flagler Beach & Palm Coast, Florida
