Short Sale or Foreclosure?
What is a mortgage short sale? Should I do a short sale or foreclosure? A mortgage short sale occurs when a financially distressed borrower arranges a sale for less than the outstanding mortgage balance. The lender accepts the proceeds of the house sale which is short of the full repayment of the mortgage. The borrower, then, receives a release from the mortgage obligation. The lender wants to avoid what would amount to larger losses if it were to foreclose on the mortgage.
Is it better to do a short sale or foreclosure?
NOLO says saving your credit score may be the most touted reason for a mortgage short sale, however, according to myFICO, short sales, foreclosures, and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts and are considered the same for purposes of your FICO score.
A short sale may be considered to be a derogatory mark on your credit even though credit bureaus do not use the word “short sale” on your credit report. Your credit report may read “paid in full for less than agreed” or “settled for less,” among other categories.
There are differences in the waiting period until you can apply for a new loan. Fannie Mae’s 2016 guidelines allow you to reapply for a mortgage four years after a short sale with a 10 percent down payment.
Waiting Periods after a Short Sale or Foreclosure?
If you sold your home as a short sale due to extenuating circumstances, you can reapply for a Fannie Mae-backed mortgage after two years. You will need appropriate documentation of the circumstances. You may also qualify for an FHA loan one year after a short sale.
With a foreclosure, if your foreclosure was due to extenuating circumstances, you may be eligible to buy another home in three years. Otherwise, the standard waiting period remains seven years, notes Fannie Mae in its latest guidelines. Similar to its short sale guidelines, FHA allows those who foreclosed on their homes to reapply for mortgages after 12 months.
When you have waited the required time after a short sale or foreclosure, lenders don’t ask if you have sold a house as a short sale. They do ask if you ever had a foreclosure.
Short Sales Don’t Always Cancel the Remaining Debt on the Mortgage
When a lender approves a mortgage short sale, what does the lender agree to do? At the very least, the lender agrees to remove or release the lien on the property. A seller would have a near impossible task in selling a property without this lien release.
Is the lender also agreeing to cancel the seller’s obligation to repay the loan in full? Not necessarily
Judgments are often negotiated between the seller and the short sale lender.
Banks are generally unwilling to negotiate deficiency judgments with the homeowner after a foreclosure.
In Missouri, rules may not protect the borrower from deficiencies, and you need to contact an attorney to see if these rules protect you.
You May Owe Taxes on the Deficiency
If your lender forgives you for a deficiency after a mortgage short sale, you may owe taxes on the forgiven amount. That’s because it’s considered income by the IRS, upon which you may owe federal and state income tax. Under the federal Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from your income all or a portion of the amount of forgiven debt in a short sale.
Hire an Attorney to review all documents
Since short sales are complicated transactions, we recommend you hire an attorney to review the documents. The release of lien and protection from tax deficiency are very important to your financial welfare.
Terra Firma Property Solutions, LLC is a professional, full-service real estate solutions firm.
We buy and sell properties throughout the greater Kansas City area. We specialize in buying distressed homes, then renovating and reselling them to home buyers and landlords. Terra Firma Property Solutions: excited to be part of the economic rejuvenation of Kansas City and its surrounding areas.
Call us today at (816) 866.0566
