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Short Sale or Foreclosure: Which is the Better Option?

Losing your home to bank foreclosure, resulting from your inability to make your monthly mortgage payment(s) is one of life's most challenging experiences. Foreclosure is also an event that will impact your credit score for years to come. Foreclosures often result from the unexpected: a major accident, serious illness, death of co-owner, divorce, job loss, or more and more often as the result of a resetting interest only or adjustable rate mortgage. If you are facing any of the above it is better to understand your options and take action, rather than standing idly bye and waiting for the foreclosure to take place.

Foreclosure is the worst of your available options

As most people know, the result of a foreclosure is the bank will take your home. Depending upon the circumstances and the state you live in, the lender can also get a judgment against you for the cost of the foreclosure and the arrearages you owe. The foreclosure will ruin your credit score for many years to come, and make obtaining any other type of credit very difficult. If at all possible, you want to avoid going through a foreclosure.

When foreclosure seems inevitable, consider a Short Sale

Banks first choice is rarely to foreclose. Typically, it is their last option in an effort make the best they can out of a bad situation. For homeowners who have found themselves in dire straights financially, a popular option is to pursue a short sale. In a short sale, you sell your home for less money than what is owed on it. The biggest challenge is getting your bank/lender to agree to the short sale. On the one hand, they don't want to foreclose and take ownership of your home, but on the other, they aren't thrilled about forgiving the debt you owe and passing the loss to their share holders and other investors. If you are considering a short sale, your best course of action is to pursue it the moment you realize you are falling behind on your mortgage payments and you are not willing and/or able make any more payments. Currently in California, it takes a bank/lender a minimum of seven month to foreclose. If you move quickly on doing a short sale, the bank/lender will have a lot to lose if they don't work with you. If you wait until 5-6 months have past, after skipping your first payment, it is unlikely you will have success with a short sale.

The downside to a Short Sale

Although a short sale will prevent a foreclosure, it will still have a negative impact on your credit score, often times lowering it by hundreds of points. This stigma can eventually be overcome and may dissipate much quicker than a foreclosure. If possible, keep some credit cards open, use them regularly and responsibly and pay them off every month. The next area of concern is the "forgiveness of debt." In years past, even though you never saw a dime of it, the IRS and the state tax collectors would consider the difference between the mortgage balance and the home sale proceeds from the short sale to be taxable income. The Mortgage Forgiveness Debt Relief Act of 2007 put a moratorium on federal taxes on short sales through 2012, but laws change regularly, and it is always a good idea to consult your tax planner/advisor prior to pursuing a short sale.

After considering your options, do everything you can to avoid foreclosure

Going through a short sale won't be pleasant and will take some effort, but it will be a better alternative than a foreclosure. When you realize you are in trouble and don't know where to turn, don't slip into denial and hope the bank/lender will go away. Instead, consider whether you will qualify for a short sale and approach your bank/lender with an offer from an interested buyer before you are out of options.

Ready for a Short Sale? Don't attempt to do it alone

For a number of reasons, most attempted short sales are unsuccessful. The banks/lenders have specific paperwork and guidelines that must be understood and adhered to. Each bank/lender is different and there is no single or broad approach that works with each. The idea of losing your home to foreclosure is scary and a short sale can lessen the blow, but it must be done in and efficient and timely manner.

When selecting a real estate agent to assist you, you need one that has years and years of experience in the business and knows how to close real estate transactions. More and more frequently, these experienced agents have realized that the most efficient way to effectively list and close a short sale is to partner with a professional "short sale negotiating firm" that will be the go-between the Realtor and the Bank/Lender. In this process, the real estate agent focuses on their area of specialty: listing, marketing, negotiating and closing the sale, and the short sale negotiating firm: collecting documents from the seller, compiling the short sale package and calling/emailing the bank's asset manager on a daily basis until an agreement with the bank is reached. Remember, you aren't going to get a dime out of the short sale... Your job is to hire professional(s) who will get the short sale done while keeping what's left of your money in your pocket.

Hire an experienced Short Sale team!

If you live in the Sacramento Area and are considering a short sale, I encourage you to consider my services. I am a licensed Realtor / broker / agent and have been serving California since 1992. I am the founder and owner of Brokers Inc. Residential Real Estate and I have partnered with a couple of Short Sale Negotiating Firms that specialize in closing short sales. If you live in other areas of California and would like a referral to an experienced agent in your area, email me and I'll send you the names of a couple of reputable real estate agents to help you out. If you are located in the Sacramento Area, give me a call and I'll come meet with you today!

More good news for consumers, and the housing market recovery! Following the Senate's favorable vote yesterday, the U.S. House of Representatives just voted 403 to 12 to extend the home buyer tax credit, expanding the parameters to include existing homeowners and not just first-time buyers. President Obama to sign the legislation in short order.

As it now stands, the federal tax credit will be extended through April 30, 2010, with a 60-day extension if a binding contract is in place prior to the deadline. First-time home buyers will continue to be eligible for a tax credit of up to $8,000, while existing homeowners will be eligible for a reduced credit of up to $6,500. To qualify for the $6,500 credit, existing homeowners must have lived in their current residences for at least five years. The bill also increases the qualifying income limits from $75,000 for single tax filers and $150,000 for joint filers to $125,000 and $225,000, respectively. The purchase price of the home is capped at $800,000 in both instances.

Under additional provisions included in the bill, taxpayers can claim the credit on purchases completed in 2010 on their 2009 income tax returns. The legislation maintains the provision that home buyers do not have to repay the credit provided the home remains their primary residence for 36 months after purchase, and waives this requirement for active duty military personnel who move due to a military order.

Nationwide, more than 1.4 million first-time home buyers were given the opportunity to become homeowners as a result of the Federal Tax Credit for First-time Home Buyers. That number is expected to increase dramatically in the months ahead with this new legislation in place.

If you are a first-time home buyer, looking to purchase in El Dorado Hills, CA and get the $8,000 Federal Tax Credit currently being offered, time is running out! Barring an extension by Congress, you now have 40 days left to close escrow on your purchase or you will miss out on the tax credit which expires on 11/30/09. If you still want to a shot at the free money, move quickly! See my last blog posting on this topic:

ORIGINALLY POSTED in September: In an effort to off-set last year's fincial meltdown and the ensuing recession, the current administration created a tax credit of up to $8,000 for certain first-time home buyers in the $787 billion Economic Stimulus Package that was passed in February, 2009. Through this program, you are eligible to receive an $8,000 tax credit when you purchase a principal residence if you have an adjusted gross income of $75,000 or less (or $150,000 for married couples), you have not owned a home during the three years leading up to the purchase, and, you close escrow on your purchase prior to November 30, 2009.

Translation: Under the current First-Time Home Buyer Tax Credit program, if you would like the opportunity to get an $8,000 gift from the Federal Government, you have 71 days left to get pre-approved for a loan, find a home you would like to purchase, negotiate the contract, complete all the inspections and close escrow. The clock is ticking... Now is the time to take action!

Will Congress and our President allow this program to expire? Will it be extended? Will it be replaced by a different program? At this point, the answer is a resounding "Who knows?" If you want to move forward with any certainty, close escrow on your home purchase by November 30, 2009, meet the criteria outlined above, and you'll qualify for a juicy $8,000 gift from Uncle Sam.

-Aaron Cullen, Realtor, Broker, Owner Brokers Inc. Residential Real Estate

In an effort to off-set last year's fincial meltdown and the ensuing recession, the current administration created a tax credit of up to $8,000 for certain first-time home buyers in the $787 billion Economic Stimulus Package that was passed in February, 2009. Through this program, you are eligible to receive an $8,000 tax credit when you purchase a principal residence if you have an adjusted gross income of $75,000 or less (or $150,000 for married couples), you have not owned a home during the three years leading up to the purchase, and, you close escrow on your purchase prior to November 30, 2009.

Translation: Under the current First-Time Home Buyer Tax Credit program, if you would like the opportunity to get an $8,000 gift from the Federal Government, you have 71 days left to get pre-approved for a loan, find a home you would like to purchase, negotiate the contract, complete all the inspections and close escrow. The clock is ticking... Now is the time to take action!

Will Congress and our President allow this program to expire? Will it be extended? Will it be replaced by a different program? At this point, the answer is a resounding "Who knows?" If you want to move forward with any certainty, close escrow on your home purchase by November 30, 2009, meet the criteria outlined above, and you'll qualify for a juicy $8,000 gift from Uncle Sam.

-Aaron Cullen, Realtor, Broker, Owner Brokers Inc. Residential Real Estate