The major benefit of a short sale is that your FICO score will be about 25 points higher than if you file bankruptcy. Bankruptcy will drop a great FICO score by about 100 points. On the other hand, a short sale will drop it about 80 points. However, for some rarely used mortgage programs, if you do a short sale, you do not have to wait the full two years before you can qualify for another mortgage.
Short Sale Benefits and Information
Credit Scores and Your Next Mortgage
For almost all of the loan programs, you have to wait 2 years which is the same period of time you have to wait after you file bankruptcy. The few loan programs which do exist which allow you to finance a home sooner might also require you to relocate to Alaska. Interestingly, FHA, Kentucky Housing, VA, and other major programs have little or no difference between filing bankruptcy and doing a short sale.
Foreclosure vs Short Sale Credit Scores
Again, foreclosure drops your score about 300 points but, a short sale is better on your FICO score. If a foreclosure is on your credit record it generally takes 3 years before you qualify for a mortgage with Kentucky Housing, VA, or FHA. But, some conventional lenders will continue to turn down your housing application for 7 years.
There is a simple principle you can’t get around. When a borrower doesn’t repay the money on time and in full they become a higher risk. If you are a higher risk, the bank will not offer you the lowest mortgage rates, same programs, and benefits lower risk applications pay. When someone claims they can get around this they are probably lying to you and simply trying to scam money from you. Keep in mind that if they lie about one item they are probably lying about other items.
The mortgage company takes a greater loss with a foreclosure sale than it does with bankruptcy or short sale. Many people who file for bankruptcy still pay their mortgage on time. People who do a short sale also repay the loan better than if a foreclosure sale happens. The good part is, the bank does not have to purchase the property and then find a buyer because you have done that work for them.
Short Sales that Leave You With No Deficiency
Most states automatically enter a deficiency judgment after a property sells in foreclosure. Some but not all mortgage companies sell these judgments to debt buyers who will attempt to collect. Collection of a deficiency is rare but it can occur and you just don’t know when it might happen. Kentucky allows the mortgage company to collect on judgments up to 20 years after the judgment is entered. Then, it can remain on your credit report as long as the lender attempts to collect.
Here’s an example. The judgment may be entered in 2000. However, if the collector attempts to collect in 2010 and reports it the debt is on your credit report again in 2010. If you buy a home in 2015 and the creditor files a judgment lien in 2016 the lien attaches. That judgment is then renewable in 2019 for another 20 years. While it’s true that mortgage lenders rarely attempt to collect after the sale of the home, it is legal and sometimes happens.
A Short Sale Does Not Always Mean the Lender Agrees to No Deficiency
When you enter a short sale most lenders will agree that there is no deficiency. However, this does not mean the debt is not forgiven. It also doesn’t mean there is no tax debt. What it does mean is that the lender will not pursue you for the deficiency. Interestingly, some local lenders including Fifth Third and BB&T, require the debtor to sign a new unsecured note for the deficiency. Then, they can sue on their agreement to a short sale.
Furthermore, if there is a second mortgage or judicial liens then those parties also have to agree to the short sale to remove their liens. In some cases, there are so many liens it becomes impossible to get everyone to release these liens.
It is worth noting that chapter 7 bankruptcy strips off judicial liens if there is no equity. Additionally, in Chapter 13 bankruptcy a second mortgage strips off if there is no equity.
Louisville Short Sale Costs
Short Sale Tax Problems
All Louisville short sales are not created equal. Some mortgage companies might promise they will never attempt to collect any deficiency from you later. But the internal revenue requires them to accurately report the loss on their taxes and to turn in a 1099. It is a tax benefit to the mortgage company when the loss is reported and it is a tax cost to you when the income is reported. Even if your real estate agent or the Mortgage company promises not to collect from you the earned income will be reported to the IRS.
This creates a tax liability. Any agreement you make with the mortgage company is not binding on the IRS. They didn’t agree with it. You can’t rely on your real estate agent for tax or accounting advice unless he is also CPA. A real estate broker is not normally required to have a college education and until the 1990’s he was not required to have any formal courses at any college. The only way to guarantee you avoid the tax liability is by filing bankruptcy before the sale. By statute, you don’t owe the income tax if you wipe out the liability for the debt before the sale.
Short Sale Property Warranties and Costs
When a homeowner sells a home he normally sells it as a habitable home with no knowledge of any defects. There are some warranties or promises you give whenever you sell a home. The new owner can normally sue for items such as the title being good and there are no hazardous problems with the property. If the buyer has to pay for undisclosed defects which you knew about then you may be liable for repairs.
I had one such case where the seller failed to report a plumbing problem at closing. He was sued by the buyer for close to 20,000 in repair costs and another 100,000 in attorney fees. Because this was characterized as a consumer fraud the debt was not even dischargeable in bankruptcy because it was alleged to be a fraud. In some cases, you may need to do some repair work to sell the home so it can be financed.
Louisville Short Sale Timing
If you file an answer and discovery after being served with foreclosure it delays the litigation. In selling a home, it takes time to locate the buyer, qualify the buyer and property for a mortgage, and close the sale. In fact, this can take months or years. The mortgage company or the attorney for the mortgage company may process the foreclosure while you are trying to process the short sale. For these reasons, you might need to file an answer and even discovery to delay the foreclosure long enough to short sale the home. During all of this time, you are sitting rent-free in the home.
But, you also don’t want to have the short sale process fail and then have the property quickly sold. In fact, you should plan other options just in case a short sale cannot be closed. The timing of the short sale is something you need to plan. The other options are also important. The fact is each month which goes by allows you to save paying the rent on another home. So, if filing an answer gives you six months, and filing discovery delays it another six months then, this might give you the time you need to process the short sale.
Get Extra Time for Louisville Short Sales
Many people fail to defend the foreclosure, however, the answer is due 20 days after you’re served. You can be up to a week late in filing your answer. But, then you must ask for an extension of time. Be aware, however, that if too much time goes by you lose these rights entirely. In order to give yourself more time in the home, you might have to file a bankruptcy to delay the sale if the lender has a judgment or order for the sale.
If you have an offer on the table after the judgment, the mortgage company may postpone the sale but that is rare. After they have gotten a judgment or an order for a sale they will rarely delay the sale. They may look at an offer after the sale. But after the foreclosure sale happens, the damage to your credit is done.
A short sale does not eliminate your liability for any judgment liens or other debts. If you are having problems with other debts try to remember you can process a short sale or mortgage modification during a Chapter 13 or Chapter 7.
Resources for Foreclosures
Other Related Information
We practice in western and eastern Kentucky and southern Indiana bankruptcy court. If you’re facing foreclosure and want to save your home, contact my office right away. Nick C. Thompson, Attorney: 502-625-0905