Short Sales Sellers - Be sure to get a Full Release and Satisfaction from your Lender

In all situation you should consult with a lawyer who should strive to obtain a Full Release and Satisfaction of your debt. Obtaining a full release and satisfaction from your lender(s) is best for you, the obligor, but in some instances the lender(s) will not allow it. In fact, sometimes they present you with two separate amounts, one for a lien release only and another for a full release and satisfaction.

So how much can I owe after a Short Sale?

Remember, lenders accept short payoffs because they make more money than taking the houses back and selling them later. But in either situation (foreclosure vs. short sale), the lender typically loses large sums of money. With their loss:

1. If Full Release and Satisfaction - They can write the loss off on their taxes as a business loss, but they must report it to the IRS and send you a 1099-C for the amount. IRS says that because you technically received the benefit of the money, and you did not have to pay it back, then it is treated as ordinary income that you need to pay tax on. However, the Federal Mortgage Debt Relief Act of 2007 has put a moratorium on IRS collecting tax on all foreclosure-related 1099's for primary residences through 2010. Additionally, the IRS Form 982 which may also release you from paying the tax if you can show you were insolvent. In all cases you need to consult with your financial advisor or accountant about the tax consequences of foreclosure. We are neither.

2. If Lien Release Only - The lender (or someone they sell the note to) can choose to sue you to collect the difference from you. The lender has the right in most states to pursue you for the difference between the amount they recover (regardless whether short sale or foreclosure) vs. how much they were owed. This amount is often called the deficiency or the shortfall . They can do this because even though they released the lien, you signed a promise to pay when you received the loan. Not all lenders do this as some are more aggressive than others. Contact our office today to learn our recent experiences with your particular lender(s).

   They may:

   • Ask you to sign a new unsecurd promissory note for all or part of the deficiency as a condition for them agreeing to the short payoff. These notes are usually 0% interest and payable over 3 - 15 years.

   • Ask for a small contribution towards their loss at closing. This depends on the size of the loss and your financial situation. The more they see you have, the more they'll ask for.  Typically this amount is about $2000 - $8000 and is in lieu of a promissory note.

   • Sell this debt (the deficiency amount) to a collection agency or attorney who can pursue collection efforts, obtain a court judgment against you and garnish your wages or assets. This is generally quite unpleasant but fortunately it is uncommon, but does happen.

   • Do nothing.  After absorbing a big loss, sometimes lenders do not want to spend another minute dealing with it.   Thus it is possible you may just receive a 1099.  Assuming the lender will do nothing is a recipe for disaster.
     

One of the main reasons banks allow Short Sales is because the lender(s) receive more money through a short sale than by taking your house back and reselling it. This in turn generally creates a smaller shortfall that you could potentially be liable for.

When can I get buy a new home after a short sale, foreclosure or bankruptcy ?

This simple guide will provide you with an idea of the required lender imposed wait times when working with bankruptcies, foreclosures and short sales.  These waiting periods are subject to change and may vary based on your specific situation.

Conventional Loans:

    * Chapter 7 BK – 4 year waiting period from the discharge/dismissal date
    * Chapter 13 BK – 2 year waiting period from the discharge date or 4 years from the dismissal date
    * Multiple Bankruptcies – If there are multiple bankruptcies within a 7 year period, the waiting period is 5 years from the most recent discharge/dismissal date
    * Foreclosure – 7 year waiting period from the completion date
    * Deed-In-Lieu/Pre-Foreclosure Sale (Short Sale) – Minimum 2 year waiting period

FHA/VA Loans:

    * Chapter 7 BK – 2 year waiting period from the discharge/dismissal date
    * Chapter 13 BK – 1 year of the payout must have elapsed and the borrower's performance must have been paid as agreed. Document that the borrower's current situation is not likely to recur. The court must grant permission to the borrower to enter into a mortgage transaction.
    * Foreclosure/Pre-Foreclosure/Short Sale – 3 year waiting period
    * VA Loans – 2 year waiting period for Foreclosures

I hope that helps. How the short sale is reported to the credit reporting agencies can impact teh waiting time.  Even if you are not late on a payment, most will banks will report the loan as "settled for less than owed" which what the Loan Underwriters look for to determine the waiting periods described above. 

Seller Financing/ Contract for Deed:

In some cases sellers are willing to sell you a home with little or no waiting period.  You will generally pay higher interest adn may pay a higher prucase price than if you can get a loan through normal channels.  Each situation is different.  Please inquire.