What are your RISKS in a Short Sale?
In June 2010 there were over 848 auction notices given to homeowners in New Hampshire and the number of advertised auction notices in Massachusetts more than doubled to reach 2,858 in May 2010 compared to 1,378 during the same month last year. A total of 13,969 auction notices from January through May were published. The above information from the Warren Group represents a 139.7 percent jump from 5,828 during the same five months in 2009 in Massachusetts. New Hampshire statistics were reported by Real Data.
If you are a homeowner in Massachusetts or New Hampshire and are considering a short sale, there are some risks you should weigh. A short sale is a viable alternative to foreclosure.
It is not uncommon in today’s economy to have lost your job, had a reduction of pay, gone through a divorce, death in the family, or even have an ARM mortgage that wasn’t fixed into a rate that you could afford. There are NUMEROUS situations that face homeowners that put a strain on their income and their ability to pay their mortgage. At some point, most homeowners realize their house is something they can no longer afford and feel trapped because its value is no longer worth what they paid. So, what are the options?
There are several options including a modification, forbearance, deed in lieu, or even bankruptcy, but most homeowners have tried one of these options or several without success. One of the last options a homeowner may consider is a short sale. It’s the last option because most people don’t want to sell their homes, however, there comes the time a homeowner realizes holding onto their home drains them financially too much.
The homeowner should know the risks of a potential “traditional” short sale. There is a new type of short sale called a HAFA short sale that has other risks altogether, so for today, our focus is the traditional short sale.
The biggest risk in considering a short sale is the home could go to foreclosure. If a homeowner stops making payments, at the 90-day mark, most lenders can escalate the loan and call the whole thing due. It doesn’t mean it will happen at that time, but it could. Most lenders don’t want to foreclose as it costs them an average of $65,000.
There are usually three possible outcomes to a successful short sale the homeowner should be made aware of:
1) The lender agrees to forgive the deficient amount. The deficient amount is the amount the homeowner owes minus the accepted sale amount. So for instance, a home that had a mortgage of $200,000 and was bought for $140,000 would have a $60,000 deficient amount. Most distressed homeowners can’t come to the closing with that $60,000 so the lender has the say on what happens to that $60,000. If the lender agrees to forgive the deficient amount, a 1099-C will be generated and the homeowner MAY have tax ramifications on that $60,0000. MOST homeowners will be deemed insolvent under the mortgage debt forgiveness act of 2007 and a homeowner could walk away at that point and never think about the house again. Only your accountant can tell you if you are insolvent.
2) The lender does NOT forgive the deficiency. They “reserve the right to pursue” the deficient amount. In this case, they are reserving that right to collect their $60,000. Now it doesn’t mean they WILL pursue the homeowner, only that they are reserving the right to pursue the homeowner. What homeowners in Massachusetts and New Hampshire need to be aware of is the statute of limitations is 6 years. They have 6 years to collect that deficient amount. If this is the outcome of your short sale, you will NOT be issued a 1099-C,
3) The lender could ask for some form of payment at closing or a promissory note. So, for instance, they may ask for $12,000 in the form of a promissory note. This amount is usually spread over a few years. There is no way to tell what amount they will ask for or how long they will spread out the repayment of that amount.
The homeowner makes the decision on whether or not the terms of the approval are acceptable to move forward with the short sale. If the homeowner decides not to move forward however, the outcome will likely be foreclosure, in which there is an automatic deficiency listed on their credit report and the foreclosure.
If the homeowner pursues a short sale their credit will also struggle, however it will be far less damaging than a foreclosure. Their ability to purchase a home again can be anywhere from 1-3 years as opposed to 5-7 in a foreclosure.
A short sale is an excellent alternative to foreclosure, however, there are risks the homeowner should consider. The more information a homeowner has about the potential outcome to their short sale the better position they are in to make decisions on their future.
For Realtors, Attorneys, Title companies, etc interested in our services please go to http://massachusettslossmitigation.com/
For homeowners needing assistance with avoiding foreclosure please go to http://shortsalemitigation.net/
2500 Main Street,
Tewksbury, MA 01876