We live in a foreclosure bubble right now. Suddenly everyone is an REO (Real Estate Owned) or Short Sale expert. The sad reality is that many individuals such as real estate agents, as well as some attorneys and CPA’s, do not really understand the in’s and out’s of Short Sales & Foreclosures to the point of giving out information that is not only incorrect but dangerous. I have included some bullet points that can shed some light on differences between Short Sales & Foreclosures…

1.] Current Employment

Foreclosure; employers can and do check credit…may create challenges.
Short Sale; not reported on credit report…would not create an employment challenge (However, late payments are reported & may provide challenges).

2.] Future Employment…
Foreclosure; creates challenges as it is highly detrimental. Employers often require a credit check on job applications.
Short Sale; not reported on a credit check and is not a challenge.

3.] Security Clearance…
Foreclosure; Those working in sensitive areas such as police, military, CIA, or any job that requires a high security clearance will almost certainly be transferred or terminated out of that position.
Short Sale; typically, does not create a security clearance issue.

4.] Deficiency Judgment…
Foreclosure; no negotiating with the lender…lender has the right to pursue a deficiency judgment in Nevada.
Short Sale; it may be possible to convince the lender to give up its right to pursue a deficiency judgment against the borrower.

5.] Deficiency Amounts…
Foreclosure; house sits vacant, goes through BPO and auction process…in a declining market values may decrease which can create a higher deficiency.
Short Sale; Typically, the homeowner stays in the home, so property remains in better condition. House is often sold sooner at a higher market value, resulting in a lower deficiency.

6.] Fannie Mae Loans (effective 5/21/2008)…
Foreclosure; homeowners who lose their home to Foreclosure are ineligible for a Fannie Mae loan for 5 years.
Short Sale; homeowners who negotiate and close a Short Sale will be eligible for a Fannie Mae loan in 2 years.

7.] Investor Loans…
Foreclosure; investors who lose a property to Foreclosure are ineligible for a Fannie Mae loan for 7 years
Short Sale; investors who negotiate and close a Short Sale will be eligible for a Fannie Mae loan in 2 years.

8.] Mortgage Loans…
Foreclosure; borrowers who lost a property to Foreclosure will have to disclose this on a 1003 loan application. This could and will affect the interest rate.
Short Sale; no similar question or declaration on the 1003 applications in regards to a Short Sale.

9.] FICO Score…
Foreclosure; FICO scores will drop anywhere from 200-300 points. It will remain on the credit report and as a matter of public record for 10 years.
Short Sale; not reported on the credit history. They are typically reported as “paid in full, settled”.

Short Selling Your Home; What is Needed…What is Required?…

Engaging Your Real Estate Professional…

1.] Are they “Short Sale Certified”?
2.] Do they have a Real Estate Team?
3.] Short Sale Package.
A.] Financial statement showing income & expenses.
B.] Last 2 years tax returns.
C.] Last 2 months bank statements.
D.] Last 2 pay stubbs.
E.] Hardship letter.
F.] Letter of Authorization giving the RE agent authority to speak to lender.
G.] Very important to have every page copied and prepared.

Department of Treasury; Guideline Changes as of 11/30/2009 that will apply to the Home Affordable Modification Program (HAMP) and the Home Affordable Foreclosure Alternatives (HAFA) which is part of HAMP.

1.] Streamline the approach by utilizing uniform guidelines

2.] Provide a venue where;
A.] Loan modification is attempted first under timed constraints.
B.] If borrower does not qualify for a loan modification or fails the trial period, the property will be recommended for Short Sale.
C.] Loans that will qualify under this program;
*] Property is borrower’s principal residence.
*] Mortgage is first lien mortgage originated on or before 1/1/2009.
*] Mortgage is delinquent or default is foreseeable.
*] Current unpaid balance is <$729,750.00 on a single family residence (SFR).
*] Borrower’s total monthly mortgage payment exceeds 31% of borrower’s gross monthly income.

3.]If the lender accepts the Short Sale, according to the guidelines…there will be no recourse.

Important Website for More Information:
www.IRS.gov and click on the Mortgage Debt Relief Act of 2007.
www.HUD.gov and click on Avoiding Foreclosure page.
www.MakingHomeAffordable.gov for more information on President Obama’s plan
www.Freddiemac.com/avoidforeclosure

**Importance of good Legal & Tax Advice**  This element I cannot stress enough…totally empowering.  Prior to going forward with a  Short Sale or allowing you real estate to be Foreclosed upon, this is one of the smartest and most empowering things you can do to insulate yourself from further disaster.  Know your rights!

Stop giving away your power.  When you seek approval to shoot for your goals and dreams, you give away your power. Don’t ask permission to live your life, just go live it! The people you most want approval from may not have your best interest at heart, but rather their own. They may want to protect you, yet not realize your strength. They may not understand, so show them.

Get quiet, listen to your gut, then go for it. It’s ok to get opinions, weigh options, and do your research, after all you want to make sure you’re starting down the right path to your goals. But don’t give away your power, write your own permission slip.

Stay CLEAR…stay FOCUSED…and it will be yours…Heather Frey, President and Founder of SmashFit.com.  Heather had such an amazing post that I asked her permission to reprint it along with my thoughts.

When you quit…you really fail. You have potential…act on it…create results. Results yield a belief which funnels more potential. Even negative results  can be positive…realizing moving forward that you had a 50/50 chance of having a positive outcome…never ever quit! Always “push through” no matter how challenging and daunting it may seem. Then you will truly WIN!!  I remember a quote from the movie “The Replacements“…Gene Hackman told Keanu Reaves that when the game is on the line, winners always want the ball.  do you want the ball?  Do you see yourself as a winner?

Empowerment is within your reach…reach out and grab it…never let go!

Short Sales are challenging enough without bringing a qualified CPA to the table. Often times, real estate agents in the name of trying to provide good service, step into areas that they should avoid. One of these areas is anything to do with taxes. It is one thing to give a client a copy of the Mortgage Debt Relief Act of 2007, along with specific directions to get to areas of the IRS.gov site that deals with the tax ramifications of Short Sales & Foreclosures. It is quite another to tell the client that under no circumstances will they be liable for the 1009-C that will be submitted by the lender.

I always recommend that my clients seek the counsel of their CPA prior to going through a Short Sale transaction. If they choose not to seek that guidance, that is a choice that they must make and be responsible for any potential tax issues after the fact. There are many issues that can surround a Short Sale transaction depending on the financial status of the seller.

The Mortgage Debt Relief Act, the 1009-C, the form 982, etc…, etc… are pathways set up to help the client get through this challenging time with as minimal financial pain as possible. Understanding the subtleties of the law is for a professional. It is their job to protect you, the seller, throughout this process and empower you to become financially whole again.

Ask yourself this…is it worth the risk? Do you feel confident that you understand the legal aspects of this type of transaction to the point that you are empowered to handle any potential tax challenges?