Short Sale StepsWhat if I have a second mortgage?
It doesn’t matter if you take out a second mortgage to help buy the home or if you have secured a home equity loan after the fact. The second lender will always be in second position, unless the first is willing to subordinate. Ordinarily, a mortgage lender who is in first position will not subordinate the position.
First in position is first in the right to collect from foreclosure proceedings. This means when a Notice of Default is filed, if the second lender wants to be first in line to receive proceeds from the auction or sale or to take the property back, the second lender must initiate its own foreclosure proceedings.
In most parts of the country, this means the second lender must make up the back payments to the first lender, pay the first lender’s cost to file the Notice of Default and associated expenses, and then file its own Notice of Default. If the second lender does not do this, the second lender could get wiped out in the foreclosure and receive nothing, especially if there is not enough money to go around.
When the second lender receives a notice that states the first has foreclosed, after checking the value of the home, many second lenders do not initiate their own foreclosure proceedings. They take this stance because there might not be enough equity to make the cost of foreclosure profitable for the second lender. This non-action leaves the second lender in a vulnerable position. During a short sale your Realtor can and will need to negotiate with the holder of the second mortgage note. Typically the second lien holder will lose money, and in the past have sometimes been difficult to negotiate with. The bank will have final say over the accepted contract.
Will I still have to pay taxes if I do a short sale?
This is a broad question depending on whether we’re talking about property taxes or federal income taxes. In a short sale, the lender voluntarily accepts the sales price as full payment of the loan so the borrower is protected by any deficiency judgment in a short sale so be sure to negotiate that the short sale is full payment and that there is no deficiency. Otherwise, you will have to pay extra income tax if the bank sends you a 1099 for the deficiency. Some states allow for personal liability and deficiency judgments. However, in states like California, all purchase-money loans on one to four unit residential dwellings are exempt from deficiency judgments. You should consult an attorney first before making any decisions to find out what the laws are in our state.
SOMEONE will always have to pay property taxes. Whether it’s you or the lender depends on their policies and the specific agreement you reach while negotiating the short sale. It is important to remember that when a homeowner must utilize the short sale, deed–in-lieu option, or a foreclosure takes place, the IRS requires all lenders to send a 1099 Income Earnings Statement to all borrowers on the note for any deficiency balance (forgiveness of debt according to the IRS) in excess of $600. This must be reported on the borrower’s tax returns as income and taxes may be assessed. The exception would be for a purchase money loan (an original loan when the house was purchased, and no refinance has taken place), or when insolvency can be proven and the IRS determines the tax liability should be waived or lowered. In any event, a CPA and attorney who are knowledgeable in short sales and foreclosures is essential to help you.
Short Sales and your Credit
The most painful part of doing a short sale is the damage it does to your credit, 99% of the mortgage companies out there won’t even consider a short sale until you are behind on your mortgage payment, and the further you fall behind, the more it damages your credit. However time is of the essence, and a short sale will not hurt your credit as much as the multitude of late payments that often lead up to them. After you finish the short sale you will have absolutely avoided the foreclosure and your credit report will also be better than before. You may be able to negotiate with the lender that they remove any negative items from your credit report once the short sale transaction is complete.
The impact of delinquent mortgage payments can be devastating on a credit report, but until it happens, the full extent is unknown. Most credit grantors rely on credit reports to assess an individual’s bill paying reliability. Employers and insurance companies also look at past credit history to evaluate how we handle our finances. Payment histories are reported for seven years unless it is a matter of public record, such as a judgment, which remains on the credit file for 10 years. There are levels of severity, but how a future lender views your current situation depends upon how well you documented the hardship, how you have overcome it, and what other compensating factors you now have to offset the derogatory credit history.
Even if you are successful in keeping your home, your credit report will probably show 30, 60, 90-day lates by your lender. You may also have credit card lates during the same time period. These will stay on for seven years. If you file a Chapter 13 bankruptcy, and successfully complete it, it will also show for 7 years from the date of filing. If it is not completed, it will stay on your credit report for 10 years the same as a Chapter 7 bankruptcy.
If you sell your home, the above lates, if any, will stay on your credit report for the same time period. A short sale may or may not show on your credit report but is generally not considered as harmful since you took positive steps to remedy your situation.
A foreclosure is probably the worst rating that can appear on a credit report. A deed-in-lieu of foreclosure is only slightly better. Both will stay on your credit report for seven years.
You usually must wait about three to four years before buying another home at competitive interest rates.
Reestablishing a good credit history is imperative. This can be done with an excellent payment history on a new credit card, timely utility payments, and/or satisfactory rental payment records. If you have trouble obtaining an unsecured credit card, you may seek out a secured card.
Finally, it is a good idea to write a 100 word or less explanation, called a Consumer Statement, explaining the hardship to submit to the credit bureaus to include in your credit file. This explanation will remain as long as the items being explained show on the credit report.
