Information about Foreclosures, Deeds in Lieu of Foreclosures and Short Sales in Sullivan County, NY.
I have also recently written about these types of real estate deals in my blog, but I have decided to add it to my web site as well. There is so much misinformation being floated about and sellers are typically confused (and terrified) about which direction to take once they fall into the distressed property category.
Short Sales
Generally speaking, a short sale can occur when a homeowner who is behind on their mortgage payments, and who owes more on their home than it is currently worth sells the property for less than what is owed to the bank. (He sells it short of what is owed) For example, if you owe $250,000 on your mortgage, but current offers on the home are in the $210,000 range you would need to have your mortgage lender authorize the deed transfer, and have the balance forgiven. Although this means the lender loses money, often this is the best option for them. Now banks do not like to lose money, so there are some hoops that a seller must jump through to make a short sale happen, however a good real estate broker can do most of this work for you. The commission will be paid by the bank. Of the three ways to relieve oneself of a distressed property or a property that is under water, a short sale has the most advantages to a seller.
Short Sale Myths Debunked
You have to be behind on your payments to short sale your home. This is simply not true. I have done short sales where the owner was current. Now some banks don’t like to do them when the owner is not behind on payments. They feel that if they are paying now, they will keep paying. I have had loss mitigation managers tell me to call back the day the seller is 31 days late. However, these days, most of the big banks (and Freddie and Fannie) will agree to short sale where the owner is current.
A second mortgage kills a short sale deal. This couldn’t be further from the truth. It can make it a little harder, however most second mortgage holders realize the weak position they are in and will settle for pennies on the dollar. The key is getting the primary bank to agree to give a sliver of the pie to the secondary lien holder. Also there are some government subsidies in place to assist the second lien holder. (I believe it maxes out at $1,000, but it is something.) Again a good broker is key to handling these negotiations, however it can be done. Now something to keep in mind is the secondary lien holder can come after you for the balance if that is not negotiated beforehand.
Short sales take forever. Again that is simply not the case anymore. If a straightforward single mortgage short sale takes longer than 90 days start to finish, there is something wrong.
A short sale kills your credit anyway, so why bother. It is true that a short sale will ding your credit–generally speaking, about 150 points. However it is not nearly as bad as a foreclosure or a deed in lieu of foreclosure. It will show up on your credit as a resolved deficiency.
If I short sell my home, I will be hit with a big tax bill from Uncle Sam. The Mortgage Debt Relief Act was extended until Dec. 2020. As long as the home you are selling is your primary residence, then any “income” (as the government likes to view it) derived from the short sale of your home is not taxable.
Deed in Lieu Of Foreclosure
This is where the seller hands the keys and the deed to the bank and walks away. It is the civil alternative to having the bank procure a deficiency judgment against the owner, and forcing a foreclosure. This type of transaction has its advantages and disadvantages. The upside is obviously the ease. You get rid of an albatross of bad debt, and can move on both literally and figuratively. However this is a deal that a seller needs to be very wary of. The bank will write the contract, and it will most certainly favor them. Read the fine print. New York is a one action state, meaning the bank is allowed to come after you for the debt owed, or foreclose. They cannot do both. However if you voluntarily hand your deed over via a contract produced by the bank, there are all sorts of nasty little caveats that they may add, including coming after you for the balance owed. Also a deed in lieu of foreclosure looks EXACTLY like a foreclosure on your credit score. (Even if you made every single payment up to the deed transfer) Freddie and Fannie will not touch someone with a mark on their credit like that for four years, and even getting a car loan can be difficult. If you are planning on a deed in lieu of, my suggestion would be stay in the home until the eviction notice. That way you can save some money, and regroup a bit before heading out.
Foreclosure
In New York, as long as you only have one mortgage, a foreclosure is not the end of the world. Like I said above, it is a 250 point or so hit to your credit–as a delinquency judgment with no resolution. Borrowing any money for a while will be difficult, but unlike other states, you will not be pursued for the outstanding balance. The day your home is sold at public auction is the day you can start rebuilding your credit and your life.
However if you are faced with the choice I highly recommend attempting a short sale for the following reasons.
Credit Score
Short Sale
If you have been behind on payments, your credit report will reflect that. After the short sale is finalized, it will be reported as having been paid and settled for less than the full amount due – or some similar wording. This will reduce your score around 150 points. The effect of this is as short as 12 months.
Foreclosure
Your credit score could fall by as many as 250 points. It takes three years for the score to recover, and it will be on your report for 7 years. This also shows on your public record in the same way as a bankruptcy.
Deed in Lieu
The same as a foreclosure.
Credit History
A successful short sale is not added to your credit history. There is no reported item for ‘short sale.’ It will appear in the same way as a credit card charge, and the loan will be reported as paid in full, settled, or similar words.
Foreclosure
A foreclosure stays public record on your credit history for 7 years.
Deed in Lieu
The same as a foreclosure.
Future Home Purchase as Primary Residence
Short Sale
Someone who successfully finalizes a short sale will be eligible for a Fannie Mae backed mortgage after 2 years.
Foreclosure
Someone who loses their home to a foreclosure is not eligible for a Fannie Mae backed mortgage for 5 years.
Deed in Lieu
Same as a foreclosure.
I don’t mean to hammer home the point. (Or perhaps I do.) Short sales are in the sellers best interest by far.
If you are like thousands of other people who are under water on your mortgage and unsure what to do next, give me a call. I have worked and closed quite a few short sales, and I can let you know EXACTLY what your options are.