Louisville Short Sales
Short Sale benefits.
Credit Scores and your next mortgage
The major benefit from a short sale is your FICO score will be about 25 points higher than if you file bankruptcy. Bankruptcy will drop a great FiCO score about 100 points. A short sale will drop it about 80. For some rarely used mortgage programs, you will not have to wait the full 2 years before you can qualify for another mortgage if you do a short sale.
For almost all of the loan programs, you will still 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 may require you to relocate to Alaska. FHA, Kentucky Housing, VA and all of the major programs have little or no difference between filing bankruptcy and doing a short sale.
Foreclosure vs Short Sale Credit Scores
A Foreclosure drops your credit score about 300 points. A Short Sale is better than a foreclosure on your FICO score. If a foreclosure is on your credit record it will generally take 3 years before you qualify for a mortgage with Kentucky Housing, VA or FHA. 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 money on time and in full you 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 earn money from you. 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 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 bank does not have to purchase the property and then find a buyer you have done that work for them.
Short Sales generally leaves 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 may happen. Kentucky allows the mortgage company to collect on judgments up to 20 years after the judgment is entered. It can remain on your credit report as long as the lender attempts to collect.
In other words, the judgment may be entered in 2000 and 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 can be renewed in 2019 for another 20 years. Mortgage lenders rarely attempt to collect after the sale of the home but it is legal and sometimes happens.
When you enter a short sale most lenders will agree that there is no deficiency. This does not mean the debt was not forgiven. It doesn’t mean there is no tax debt. It does mean the lender will not pursue you for the deficiency. However, some lenders including Fifth Third and BB&T locally have required the Debtor to sign a new unsecured note for the deficiency which they can sue on for their agreement to a short sale. 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. Chapter 7 bankruptcy can strip off judicial liens if there is no equity. In Chapter 13 bankruptcy second mortgages can be stripped off if there is no equity.
Short Sale costs.
Short Sale tax problems
All short sales are not created equal. Some mortgage companies may 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 is 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 fraud. In some cases, you may need to do some repair work to sell the home so it can be financed.
Short Sale timing
If you file an answer and discovery after being served with a foreclosure it will delay the litigation. Often selling a home will take time to locate the buyer, qualify the buyer and property for a mortgage and to close the sale. 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 may 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 don’t want to have the short sale process fail and then have the property quickly sold. 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 important. Each month which goes by allows you to save paying the rent on another home. If filing an answer will give you 6 months and filing a discovery will delay it another 6 months then this may give you the time you need to process the short sale.
Get Extra time to do the Short Sale
Many people fail to do defend the foreclosure and the answer is due 20 days after you are served. You can be a little late in filing your answer like a week after then you should ask for an extension of time. If too much time goes by you lose these rights entirely. In order to give yourself more time in the home, you may have to file a bankruptcy to delay the sale if the lender has gotten 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 has happened the damage to your credit has been done.
Short Sales and the Mortgage Debt Relief Act of 2007
Some Short sale experts will claim you have no tax liability under the Mortgage Debt Relief Act of 2007. This act eliminated the income tax debt for a 1099 if your foreclosure sale happened between 2007 and 2012. In 2012 the act expired. Some real estate agents still quote this trying to get your business. It shows what they don’t know or dishonesty on their part. 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. We practice in western and eastern Kentucky and southern Indiana bankruptcy court.