Top Three Things to Know before You Choose to Short Sale your House
Recently I have had many people that need to short sale their house that have concerns about the bank "coming back after them" it seems like everyone has an opinion on "short sales" and some of the information I hear back from my clients is a little scary because of the inaccuracies floating around. I choose to write this blog to share my experiences with the banks I have dealt with and with the short sale clients I have helped. Below are the top three things I think all homeowners should know before they short sell their property.
- Protecting the homeowner from the bank looking for them years after they sell their property and asking them for money
- Making sure the homeowner is not paying taxes to the IRS on the sale of the property
- Minimizing the damage to the homeowner's credit score so they can start rebuilding their life (emotionally, mentally, and financially).
Below are the three main things you need to know and be concerns with when short selling a property: Will the bank forgive the Deficiency? What are the Tax Consequences? What are the Credit Implications?
I'm going to cover each of these points regarding the importance of each and what should be your main concerns.
Deficiency
First I feel that I should explain what a deficiency is - it is the difference between the amount the homeowner owes on their home and the net proceeds from the sale of the property (not the Sales Price but the NET amount made from the sale just like most people are not concerned with how much they Gross on their paycheck, they are concerned about the NET or what they "take home").
I believe one of the most important things to negotiate during a short sale is the deficiency. Will the bank or the investor on the loan have the right to find the homeowner after the sale of the property and ask them to start repaying them a portion of the loss? It should be noted that there was a law passed (to read the full bill, click here) on July 1, 2011 in the state of Nevada that banks now only have 6 months after the sale of a property to pursue a deficiency (prior to this law passing the banks had up to 6 years to pursue homeowners for deficiency). To read more about the new deficiency law in Nevada from a local attorney, click here.
Lately, I have seen many of the banks forgiving deficiencies, which is awesome for homeowners to help give them a piece of mind during the short sale process.
Tax Consequences
The next thing that most homeowners need to be concerned about in regards to limiting their future liability from a short sale is the tax consequences from the IRS. Let me start out by saying that you need to check with your Tax Advisor in this matter. I am going to go over a couple of things that I understand about this area however, each homeowner's situation is different and unique which is all the more reason to consult your Tax Professional.
In 2009, President Obama passed the Mortgage Forgiveness Debt Relief Act which is the bailout for homeowners. This Act pretty much outlines that if you live in the property that you are short selling and it is considered your primary residence, you will be "exempt" from taxes. If you lived in the property for 2 of the last 5 years, you may also be exempt from taxes as the tax professionals I have spoken with interpret the Mortgage Forgiveness Debt Relief Act like the Capital Gains Tax Laws. If you are not living in the property and are going to be short selling it, you will need to show to the IRS that you are "insolvent"which is a fancy way of saying your debt is more than your assets. To read more about the Mortgage Forgiveness Debt Relief Act click here.
Credit Implications
This area is the trickiest out of all of the three areas to be concerned about when short selling your property. Short selling a property is definitely better for your credit than a foreclosure or deed-in-lieu. Click here if you would like to see a chart that compares each option side by side.
The credit area is tricky because each bank reports short sales different to the credit agencies. When a homeowner short sells a property, the banks usually report the sale as "Settled for Less than Owed". The thing that hurts your credit more than anything throughout the shot sale process is not making a mortgage payment. That will have the biggest blow on the homeowner's credit score.
