Notes from Charlotte County, Florida

Hollie Dustin, Broker HomeChoice Real Estate, Inc. Short Sale and  Loss Mitigation Specialist

Thousands of Southwest Florida homeowners are in default on their mortgages and facing foreclosure. What many do not realize is that there may be a way to prevent an actual foreclosure. This is called a short sale.

A short sale occurs when you can no longer afford to pay your monthly payments, and the lender allows you to be released from the loan, forgiving or cancelling the balance owed.

Why would a lender accept a short sale?

A short sale has a better return on investment to the lender than a foreclosure. The average savings a lender might see from a short sale vs. a foreclosure is $14,000. They are able to cash out of the loan faster than a foreclosure process. Plus they do not have the legal fees attached.

As a homeowner, why would I choose to attempt a short sale?

Let’s face it. Bad things happen to good people.

There are many reasons why homeowners find themselves in a position of default…change in mortgage payments, loss of job, health issues, etc. When you get behind on your mortgage payments, the lender will start the foreclosure process, no exceptions. If the foreclosure takes place, you have ruined your credit for a period of up to 10 years. You can expect your credit score to go down about 100 points, making it impossible to make any future purchases using credit. A foreclosure is usually a required disclosure you must make on any credit or job application.

The lender may also file a deficiency judgment against you. A deficiency judgment can arise if the lender sells your home at auction for less than the mortgage debt. The lender then holds you responsible for the unpaid portion of the loan. The lender may take legal action to pursue payment, such as garnishing your wages.

A short sale is listed as settled debt, and is much less harmful to your credit. You can expect a decrease in your credit score of approximately 30 points vs. 100 points. The loan is forgiven, and no deficiency judgment will be placed against you.

Is it true I will be given a 1099-C by the IRS, and will owe taxes on the unpaid loan amount?

This has been a major concern for homeowners who choose to do a short sale. Previously, the IRS had the ability to consider the forgiven loan amount as earned income, and you could be taxed on that income. However, recently the House Ways and Means Committee voted to remove the phantom income tax that previously haunted distressed homeowners. Contact your accountant or attorney for further information.

Who should handle our short sale?

The most important thing to consider when deciding to work out a short sale with your lender is to use a qualified professional to handle the process and negotiations. If the processor is not experienced in the short sale process, the deal can be over before it begins.

A professional real estate professional will need to list your home on the market as the first step. Be sure they are aware you are attempting a short sale, and that they have experience working with short sales or experience working with a loss mitigator. The best scenario is to let the real estate agent handle the marketing of your home, and allow the loss mitigator to handle the short sale. That is what they are trained in, when most agents are not.

Ask if the real estate company you are considering has their own loss mitigation division, before signing a listing agreement.

What is the short sale process?

The loss mitigation representative will meet with you, explain the process and prepare your hardship package. They know upfront exactly what the lender will require when submitting your offer, and will be prepared fully to negotiate on your behalf.

Your home is listed by an experienced short sale real estate agent, who prices the home according to the loss mitigation recommendations. Remember, the goal is to bring in a quick offer and to prevent you from going into foreclosure.

Once an offer is received, an entire package is presented to the lender, and the negotiations begin.

Will the lender always accept a short sale offer?

Unfortunately, no. Some lenders will opt to continue forward with foreclosure. However, our experience is showing that lenders are becoming more and more willing to accept the offers we present.

What does it cost me to do a short sale?

Nothing. In the event that the short sale is accepted, the lender will pay the real estate commission, and the loss mitigation fee.