Short Sale and Foreclosure FACTS

Early Warning Signs of Foreclosure:

Homeownership is a cornerstone of America that is protected, promoted, and cherished.

To lose a home for any reason is devastating, but to lose it through foreclosure can also be embarrassing and demeaning.

• Credit card debt out of control. (Maxed out cards). Paying the minimum amount due.

• Paying for necessities with credit cards (groceries, utilities, etc).

• Cannot meet monthly financial obligations (choosing which bills to pay).

• Borrowing from friends and family.

• Loss of employment, or reduction in hours or wages.

• Major illness, which can cause loss of work and an increase in health expenses.

• Divorce, separation or other traumatic family or personal situations.

• Death of a spouse or significant other.

• Cannot pay the new Adjusted Payment on the ARM mortgage loan.

• Major unbudgeted maintenance expense.

• Excessive debt is the number-one cause of financial collapse and foreclosure.

If you detect any of these warnings, early intervention could help save a home.

Alternative to Foreclosure: Deed In Lieu of Foreclosure

A deed in lieu of foreclosure occurs when an owner gives a deed to the property to the lender in order to

avoid the foreclosure process. Why aren't there more deeds given in lieu of foreclosure? Many people do

not know about them and some REALTORS® don't discuss them because there is normally no

commission paid.

• Benefit: Saves the lender time and expense of a foreclosure.

• Benefit: If accepted, the owner is done with the house.

• Benefit: Get the bank to accept the property in full satisfaction of the entire debt, so that the

owner will not be chased by any debt collectors after the recording of the deed.

• Benefit: The owner can negotiate a smooth transition out of the property.

• Disadvantage: The effect on a homeowner's credit score. Under the Fannie Mae guidelines, a

deed in lieu will make the borrower ineligible for that type of loan for four years.

• Disadvantage: A lender does not have to accept a deed in lieu. There have been owners who

have written out a deed, recorded it and sent it to the lender. They do not have to accept it.

Short Sale versus Foreclosure

Many times a short sale is not the best option for a homeowner. There may be situations when a foreclosure is better for an owner than a short sale, though not the majority of the time.

Foreclosure Benefits:

• It is quick. After the sale on the courthouse steps and the expiration of any redemption period or time for an upset bid by another buyer, it is over and the house is no longer the former owner's responsibility.

• The owner gets rid of the property and does not have to maintain it.

• In comparison, short sales take longer to get a buyer and even longer for lender approval.

• On a practical basis, the agent who is going to market the home after the foreclosure will probably offer the family two weeks to move out and a little money to help in the move called Cash for Keys.

Foreclosure Disadvantages:

• Emotional toll.

• Little time to pack and move.

• Credit report and future loan applications. A foreclosure is a huge mark to a credit score. Under Fannie Mae guidelines, a homeowner will not qualify for a loan for at least five years, and probably seven years.

• Deficiency judgment, meaning there is no negotiating a settlement of any balance due on the loan. In some states, banks can come after the borrower for the balance of the loan, attorney’s fees, and other charges incurred in the foreclosure. In states like West Virginia, North Dakota, Montana, Mississippi, Minnesota, and California, this is not a factor as state law prohibits a "deficiency judgment.”

More Foreclosure Disadvantages:

• A short sale hurts homeowner's credit report LESS than a foreclosure.

Try to get the loan reported as "paid as agreed" to have the effect on the credit score minimized, but it is not common that you will succeed.

• Tax consequences can be complex. Both a foreclosure and a short sale may qualify to be nontaxable under the Mortgage Forgiveness Debt Relief Act of 2007. The cost of the foreclosure sale is added to the debt in a foreclosure sale, so the amount owed is larger than in a short sale possibly resulting in worse tax consequences.

• The rules for the "non-recourse" states of West Virginia, North Dakota, Montana, Mississippi, Minnesota, and California are complicated, so consult your tax advisor, particularly in California where the IRS seems to say that they treat sellers there like the "recourse" states for some

Situations and not for others. If it is truly non-recourse situation, there are no tax consequences of a foreclosure. For the rest of the states, look at the IRS forms that tell you to start with the amount of the debt right before the foreclosure and add the attorney’s fees and other costs to that debt. Then,

You subtract the fair market value of the property (which means you get to argue about whether the amount paid at the foreclosure sale was the fair market value, which it usually is not because fair market value is a willing buyer and seller with neither one under any undue pressure and I think

Foreclosure is the ultimate in undue pressure). The difference is usually taxable, unless you qualify for one of the exemptions in the Internal Revenue Code. In short, the difference between what you owed and the fair market value of the home is taxed as income tax, and the lender will send you a

Form 1099 A or 1099 C to specify the size of the tax consequences.