RED SHOE REALTY, Inc Broker, Cheryl Stimac has earned the Certified Distressed Property Expert (CDPE) designation, having completed extensive training in foreclosure avoidance and short sales. "This training," says Cheryl, "means I am able to help homeowners who may be facing foreclosure."
But first, let's define what the terms Short Sale and Foreclosure mean. They are quite different ways to approach a distressed property sale.
A Short Sale allows a homeowner to repay the mortgage at the price that the home sells for, even though that amount may be lower than what is owed on the property. When real estate prices are plummeting, this can save many people from Foreclosure and even personal bankruptcy.
Lenders are willing to consider short sales because they are much less costly than foreclosures.
In the Tampa Bay area, many homes are still in danger of foreclosing because while real estate prices have risen, some people who bought their homes when the market was "red hot," find that their homes are still not worth as much as they owe on them (never mind how much they paid for the home). This happens in all price ranges; even high-priced homes are not immune.
My training and experience in dealing with lenders in negotiating short sales will be invaluable as I work with sellers and lenders on complicated short sales. Here, at Red Shoe Realty, Inc, our focus is to help homeowners who may feel paralyzed by their circumstances.
Our Distressed Property Institute training in short sales can offer homeowners much better alternatives to foreclosure, which virtually destroys their credit rating. Having this training allows me to better understand market conditions and help sellers through this very emotional experience. Our goal is to help as many homeowners as possible.
The following chart compares the implications of going through a foreclosure with the implications of a short sale. I have also copied an article from the Wall Street Journal (June Fletcher, November 22, 2008) that illustrates some of the complexities of dealing with foreclosure compared to a successful short sale. (I hope you don’t have 12 properties in foreclosure.)
| Foreclosure VS. Short Sale Homeowner Consequences
|
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Issue | Foreclosure | Successful Short Sale |
Future Fannie Mae Loan Primary Residence | A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years. | A homeowner who successfully negotiates and closes a short sale will be eligible far a Fannie Mae backed mortgage after only 2 years. |
Future Fannie Mae Loan Non Primary | An Investor who allows a property to go to Foreclosure is ineligible for e Fannie Mae backed investment mortgage for a period of 7 years. | An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years. |
Future Loan with any Mortgage Company | On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” this will affect future rates. | There is no similar declaration or question regarding a short sale. |
Credit Score | Score may be lowered anywhere from 250 to over 300 points. Typically will effect score for over 3 years. | Only late payments on mortgage will show and after sale, mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sale’s affect can be as brief as 12 to 18 months. |
Credit History | Foreclosure will remain as a public record on a person's credit history for 10 years or more | Short sale is not reported on a credit history. There is no specific reporting item for “short sale”. The loan is typically reported “paid in full, settled”. |
| Foreclosure VS. Short Sale Homeowner Consequences |
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Issue |
Foreclosure |
Successful Short Sale |
Security Clearances | Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance, in almost all cases clearance will be revoked and position will be terminated. | A Short Sale on its own does not challenge most security clearances. |
Current Employment | Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination. | A short sale is not reported on a credit report and is therefore not a challenge to employment. |
Future Employment | Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment. | A short sale is not reported on a credit report and is therefore not a challenge to employment. |
Deficiency judgment | In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment. | In some successful short sales it is possible to convince the lender to give up the right to pursuit a deficiency judgment against the homeowner. |
Deficiency Judgment (amount) | In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment. | In a properly managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale resulting in a lower deficiency. |
Wall Street Journal November 22, 2008
Short Sale vs. Foreclosure
In default and underwater on 12 properties, a reader wonders if selling at a loss is any better than just walking away
By JUNE FLETCHER
Q. I am in default on 12 jointly-owned properties that I am trying to liquidate as part of a divorce. All of my properties are currently worth less than the mortgage balances, due to the tough real estate market. I am aware that I will likely be taxed for the amount of the mortgage I had that is not satisfied by any particular short sale. It seems that this would not be the case if the house is foreclosed on, or becomes bank-owned.
This almost encourages homeowners to allow foreclosure, rather than to participate in helping to sell the property (when there is no equity left), because there is not "an amount forgiven" to be taxed on. I recognize that the benefit of short-sale is to lessen the effect on one's credit report, but if a homeowner is already missing payments, how much worse will a foreclosure look?
A. Although you own an unusual number of homes, your dilemma in trying to choose between a short sale and a foreclosure is, sadly, not at all unusual these days. So I asked Craig Watts, public affairs manager of Fair Isaac Corporation in San Francisco, to comment on your case. Fair Isaac is the company that created the FICO score, used by lenders to assess borrowers' creditworthiness.
Mr. Watts said that the company assesses every negative on a credit report by three factors: recency (how recently did the negative event occur), severity (how late is the payment) and frequency (how many times you've been reported delinquent on credit obligations).
A recent bankruptcy does the most damage to your score. Mr. Watts adds that if lenders are reporting all of your mortgages as in default, the damage to your FICO score would be akin to declaring bankruptcy on all 12 accounts. For more information on credit scores and how they are calculated, visit the "credit education center" at
http://www.myfico.com/.
Although a short sale, where the lender agrees to take less than is owed on the mortgage, will drop your FICO score about as much as a foreclosure will, there is one advantage to it: You may be eligible to buy a home with an institutional loan backed by Fannie Mae or Freddie Mac more quickly than you would if it went into foreclosure.
Lenders encourage short sales over foreclosures because they generally net more from them, since foreclosures incur additional marketing, legal, processing and carrying costs. Borrowers can be considered for loans following a short sale after 24 months, if the sale was caused by extenuating circumstances outside of a borrowers' control, or 48 months if it was the result of financial mismanagement on the borrower's part, according to Freddie Mac public relations director Brad German.
As for your tax situation, you should definitely consult with your tax accountant as IRS rules change from time to time. And finally, as with all major financial decisions, do not attempt to figure out what to do by yourself. We can help you, but you would be well advised to seek additional professional tax and legal advice.