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Credit consequences of the Short Sale

CAR Short Listing Addendum form (CAR Form SSL, 8/07) clearly states:

"A Short Sale may have negative impact on Seller's credit rating even if foreclosure process has not officially begun or once begun, is not completed".

What is your experience with the Short Sale? Was your clients FICO score impacted? Always? Some times? Do you know how this might change once the new algorithm is in place in September? Please share your experience and thoughts.

Posted by Artur Urbanski on 08/31/2007 05:30 PM

Comments (187)

short sale, fico score, credit rating, short sale credit impact, credit report, experience

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187 Comments on Credit consequences of the Short Sale

AUG

2007

Artur,

It has about a 150 point negative impact vs. foreclosure which has a 250 point negative impact. I am not sure how it is going to affect the new chages to the credit industy

Thank you very much David. Does it depend on the amount or it always shows?

Artur,

I just heard a report on National Public Radio Radio (NPR) that there are serious tax implications that could arise from a short sale. Specifically that the forgiven debt amount is in fact taxable as income. Ouch!

Cheers,

David Swierczynski

I have found that both the short sale and the foreclosure will affect the credit scores. However, it's not so much the short sale process as the fact that most of these buyers were behind on their payments when they got to that point. Therefore even if they sold their home for enough to cover the loan without requesting a short sale, the resulting credit score is the same.

I have also noticed that even though both will have an affect on their score. The short sale will not only have less of an impact, but it will clear off alot quicker. Thus allowing their score to climb back up to the point of being able to purchase sooner than if they went through foreclosure.

I'm not sure what impact the new process will have. I am looking forward to seeing the results.

David - thank you for the comment. The tax implications are quite clear. I am just trying to determine the FICO score impact.

Scott, Barbara and Kim - my client doesn't have a single late payment. He has a single loan as he refinanced exactly a year ago. However, today's market value is equal to 95% of the loan amount. If you add cost of sale he might have to pay out of the pocket 15% over the sales price. He realizes the tax implications. However, he wants to avoid the drop in the FICO score. According to David from Boca Raton, the drop in score is unavoidable independent on the fact tah my client does't have late payments. Is that right David?

SEP

2007

Clifford, thank you very much for sharing your experience with us. Ask your question in Q&A (you can find in the middle of the Nav Bar at the top of the page. I am sure that you will get and advice you are looking for. Good luck.

Artur

Since you're up in Northern California, is it safe to say the home is in the $700K range (median?).

I can tell you of a scenario where I counseled a client going through a divorce, where he had to take a short sale, was $75K deficient, and it did NOT reflect on his 780 credit score, as he made arrangements to pay the deficiency at a cost of $149 per month until it was paid off. The lender agreed to waive all the interest as they did this interest free, and it is merely an unsecured loan on his credit report. I can give you several scenarios of creative avoidance that I've structured as long as the client is willing to participate as the cost of their credit will save them a huge chunk of money over the long haul.

Im in NYC on business but you can send me an email, or call me after Wednesday when I return to California, and I'll be happy to discuss further with you.

Hi Bill, thanks. This is exactly what I am looking for. The client deficit might be between $30k and $80k and he wants to avoid short sale. So we are looking to a short term loan option. I'll send you an email with details of the client scenario later today.

SEP

2007

Artur, the credit score will not depend on an amount, but obtaining a new loan down the line the bank will look at the deficit.

David, I understand. My client definitely will try to avoid a short sale. I am investigating other options with his lender. Will let you know results. Thank you for your comment.

I just completed a short sale last week. Although its not an ideal situation, I feel better than having a foreclosure on my record. Not too sure how it will affect my credit yet, I had a 720, but I've read that this will affect my score less than a foreclosure and I will be able to recover quicker. Regarding the taxes, check out this website. http://www.letstalkrealestate.com/ltretelevision.htm . Not sure if it is legit, I am planning to check with my accountant. I just found this today. According to this accountant, there is a legal way to mitigate the 1099 buy showing insolvency. Hope this helps and good luck to all.

I have a client who went through a short sale and received a 1099 for the difference. She even had PMI but the company was only willing to pay half of the deficit, leaving her with "income" which she had to claim on her taxes. Be very careful about a short sale and make sure you understand ALL of the implications that go along with it.

Jsut read in USA Today on Friday that new legislation was passed in which shortsales will not be taxed as income.

SEP

2007

Thank you M. Jones for sharing this information with us.

Tamara, thank you for sharing this with us.

David - can you point me to the article in USA Today, please? What is its title? Thanks.

I mispoke - the article said that the legislation would be proposed. Link to full article and excerpt below.

Federal Housing Adminstration to help refi at-risk loans

http://www.usatoday.com/money/economy/housing/2007-08-30-fha-subprime_N.htm

"In another bold step, Bush will propose a temporary change in tax law. It would let homeowners avoid taxes on forgiven debt if a lender agrees to alter the terms of a loan."

David,

thank you very much.

SEP

2007

Has anyone been successful in negotiating with the bank to report a short sale as "paid as agreed" or "paid" and nothing more. I have seen some hint of this, but I'm not sure if that is the case. I would be willing to owe the bank some money if I can avoid the credit impact, but there's no way I'm going to be willing to owe the whole amount.

I did credit reporting at a very large bank for many years. I also worked in the legal department and delt with filing deficiency liens and satisfactions of liens. I can tell you for a fact that you can't bargain with the bank on how to report things to credit. All financial institutions are bound by FCRA, and must report accurate information.

Why would they report as "paid as agreed" if you're actually "settling for less than full balance"??

Sometimes the only leverage banks have is negative credit reporting, they have no reason to give that up, and legally they can't misrepresent what happens on an account.

Be prepared for the deficiency judgment. Most likely, that will keep you from buying a house again until it's paid in full or you settle with the bank (again).

I've seen a lot of 2nd lien balances forgiven, but very rarely on first liens. 99% of the time, the bank is going to file the judgment. Why wouldn't they? It's income to them. If you bet a judgment against you, you'll be paying the maximum amount of interest allowed by state law. Most liens I filed were at 18% compounding interest.

In the event that you try to settle a deficiency judgment, they will typically only waive some of the interest, not the principal.

I guess I can't understand how or why someone could possibly expect to walk away with something positive after not meeting a financial obligation.

Nathan, please look to the comment #8 by Bill Nazur. He reports a success in negotiating an alternative to short sale not effecting the credit rating. As a result, I requested Bill to help me find a solution for my client. He wants to sell, but short sale due its impact on credit score is unacceptable to him. He is capable to repay a possible short term loan in a year, max. two years. Thanks for using this post to ask your question.

Davis, you are right - if its a short sale - a lender doesn't have much of a choice. Short sale means that Seller defaulted on a part of the loan. If alternative payment is negotiation - there is no default - so there is no reason for reporting it to credit agencies. Thank you for comment. I really appreciate it.

SEP

2007

Checked out that link. Good info, but the summary was basically "If you're doing a short sale, you might as well file bankruptcy, too, then you can avoid the tax liabilities."

Often, shortsales and bankruptcies go hand in hand. If someone is going into foreclosure, chances are they have a lot of other bills not being paid other than the mortgage payment.

In my experience, the mortgage payment is always the last possible payment to be paid late.

Thank you David for your feedback. It is not the case with my client. He simply wants to sell the house as it became a burden. He is looking for an alternative to short sale, e.g. a conversion of the amount he might be short at closing to a one year loan. He has means of paying off the difference with a year.

SEP

2007

Hi, I'm a homeowner and my husband and I recently enjoyed a large amount of appreciation on our 1 bedroom condo a few years back. We refianced and took out some of the equity so we could start investing and saving for our future. We were advised to invest in real estate and did so in one of the "hottest" markets around (at the time) Vegas, NV. We stupidly agreed to a loan that was different than what we were promised. We were subsidizing this rental with a renter in it until she was evicted by our managment company. After floating the entire mortgage payment for a few months we relized we would exhaust the funds we had set aside to maintain the property alot more quickly than we had planned. We began exploring a short sale with the help of a real estate agent and a professional negotiator. After a 8 month process we have had 5 serious offers which the lender allowed to walk away by dragging their feet and to top all of that off they recently lost our file. We have started the process over again. We are hoping (for their sakes)that they will finally get their act together and re-coup most of what we owe them.

We know that now that we have begun this process we have at the very least committed to a short sale which we understand will impact our credit less than a foreclusre and that it also clears off our record more quickly. Now we have an additional concern as we have a beautiful son who is almost one and needs his own room. We have been trying to sell our primary residence (1 bedroom condo) but have had no success due to 10 other units identical to ours selling in our same complex. Most of those units have equity left with which they can afford to accept a lower offer. While we are not able to, if we are to cover what we owe on our primary residence's mortgage. Also, next July our interest rate will go up, and our payment will increase $300 per month. We are not able to rent the property for more than $1100 per month and we currently pay $1435 including our monthly HOA fee.

Long story short... we were considering negotiating a short sale on our primary residence as well. We figure that if we are to have two short sales recorded on our credit it would be better to have them clear off at the same time instead of waiting around until our payment increases on the primary residence and the same thign happens again.

We know that in both states we own property the lender can not come back after us with a deficiency judgement. My husband wants to see if there are any other factors we should consider besides our FICO score impact, the length of the shorts sales remianing on the credit report and the tax ramifications. Does anyone know of anything else we should be aware of and how it might affect us? Your professional and factual advice is much appreciated.

And as a side note: we are not in default on any other bill, or credit card. I know that historically most people are not facing foreclosure unless they are experiencing diffucluty paying their other debts too. My husband is healthy, has not lost his job, and we're both educated responsible people. We just were not educated enough when we first invested and now we're paying for it. We will definitely never make this same mistake again.

Hi Young Investors,

Thank you very much for sharing your story with us. I am really sorry about your situation.

I am not sure if you are right regarding your statement deficiency judgment that lender. Per William Markham, Attorney in San Diego, "a lender cannot obtain a deficiency judgment if the underlying debt arises from "purchase-price loan," which is either a "seller carry-back loan" (see above) or a third-party purchase price loan for a owner-occupied residential property that has no more than four units (see above). You mentioned that you refinanced your residence, so the law will not apply to you as you don't hold the original "purchase price loan". I am not a lawyer - but it is my understandings (anyone else - please comment). Therefore I would be very careful in trying to do "two short" sales" in parallel - until you have a complete clarity that deficiency judgment is not a consideration. Additionally, if one lender agrees for a short sale it doesn't mean that the second one will agree as well. As a matter of fact I find it very unlikely. Therefore, you might find yourself in a situation that you will be forced to file for bankruptcy protection.

Great Information on short sales, thanks everybody.

Thank you John for dropping in. I have to say that this particular post is working far beyond my expectations.

THANK YOU EVERYONE for your contributions!

SEP

2007

Hi - I'm currently working through a short-sale on a second house I own. I took a new job in a different state and was carrying two house notes, both with 1st/2nd mortgages. The "old" residence had been on the market since 11/06 with very little activity, due to a saturated housing market in that particular area (and sub-prime fallout). I bought my now primary residence in March 07 and have been making all the payments on both houses up till now.

It was very tight, but I was making all the payments and draining some assets hoping my first home would sell soon. And I have a very good credit score, so I wanted to do all I could to maintain that. I told the lender on the first house that payments were getting unbearable and wanted to know the options, since neither of us wanted foreclosure. They told me a few options were available: short-sales, deed-in-lieu, mortgage adjustment (deferring some interest for a lower monthly payment). I pursued the short-sale and as soon as I was done completing the application, an offer came on my house. Now, I had been trying to sell my house aggressively, so it was priced $10,000 under my purchase price 2 years ago...the market headed south in the South! Because I didn't put much money down orignially, I was going to be short in order to sell my house.

I am expected to be approved in the next day or so and will end up owing the bank approx. $10k (the difference from what I owe on the 2nd mortgage and the final net amount of the house including all closing expenses). All they said is that I would continue paying the 2nd mortgage with the revised balance due to the sale of my house...just as if I had made a significant payment to lower the balance. The terms remain the same and if I am current on all my payments, no adverse comments will be reflected on my credit report. No point deductions. A short sale doesn't directly hurt your score...not paying your bills does. And short sales can be approved even when you are current on your payments...you just need to communicate with the lender.

I've done a tremendous amount of research on short-sales. Again, if you are current on your payments, you will not be adversely effected simply because you did a short sale. That is simply a change in the agreement b/t you and the lender to pay off the difference. It allows the title to be cleared so that the property can be sold. Everyone wants to avoid foreclosure.

Now, there are two options within a short sale arrangement. You can agree to repay the difference on a repayment schedule similar to your current mortgage terms, or the lender may approve to 1099 and "forgive" the difference. Your tax advisor would tell you the implications, but instead of paying the balance, you get taxed on it. I believe it's taxed according to your particular rate. Because you were forgiven this amount, it may show on your credit report as a negative, but not show as negative if you were current on your payments. There's no way to tell how many points will be taken, but within 1-2 yrs of on-time payments will restore your credit score.

I've had to be very persistent with the lenders and it's like pulling teeth to get them to explain the details and process of a short sale proceeding, but it may pay off...the market is only expected to get worse.

BTW...since the "short" amount only effected the second mortgage, the 1st mortgage lender wasn't involved at all. They would get their money once the house sold. So all my dealings were with the 2nd mort. lender.

Just one comment on for the Young Investors:

The lender was dragging their feet on my file as well. When an offer is made, you usually have to accept/decline/counter within a few days. When I called the specialist, he told me "there is no way I'm going to be able to approve the short sale in time so you may as well tell the buyer to move on to another house". I almost hit the roof! I demanded his supervisor and read her the riot act! Amazing how quick they move when you push back on them. The basic specialist probably combs through 20-30 short sale applications per month so you're just another application. They'll try to brush you off, but stay persistent! I would've called the CEO if I wasn't getting the service I was expecting.

But one thing to note about the deficiency judgement...the lender would have to approve the "forgiving" of the difference and send you a 1099. That is rare. Otherwise, you're liable for paying the difference from the final sale amount and the balance owed the lender at closing. The deal won't be finalized unless the lender is paid in full (and releases any lien on the title) or agrees to a repayment/settlement plan - the house must be sold with a clean title. They don't settlements simply so you have a clean slate...they will very likely reject your short sale unless you agree to a repayment schedule.

Sorry, that last post was a comment by me regarding the notes provided by the Young Investors...I signed off as them by mistake....

Hi Jeff,

I really appreciate your detailed explanation. What can be more educational than personal experience? You are absolutely right. Once you negotiate a repayment of your do amount - it is not a short sale anymore and should not impact your credit rating. I have a question for you. I see that you considered "deed-in-lieu of foreclosure. How do you see pros and cons of this solution. Have you analyzed credit impact of this option? Thank you again and good luck in completing your sale.

Jeff, thank you for your comment regarding the note provided by young investors.

The lender is still considering my deal a short sale as it changes the terms of the current loan arrangement. Since I'm not able to pay off the loan at closing and require a temporary "concession" from the lender - which of course, I'll be paying back - they access that flexibility through this program. But still no negative credit effect. So I'm very fortunate there.

I've looked into deed-in-lieus as well. Very different beast, and even more difficult to get a lender to approve. The financial/tax implications of this process is significant. If you are approved - which means you are moments away from foreclosure - there are two financial scenarios:

1. If the debt is forgiven, the lender would very likely come after you for the amount of the loan, unless you claim Chapt. 7 bankruptcy. Since they "forgave" your loan, you will have a significant negative hit to your credit (as if several missed payments didn't hurt it already). How much is unknown as the credit bureaus have quarky ways of calculating this and it may not be the same, but it is very negative either way. Usually those who do a DIL, will file for bankruptcy. This may stay on your credit report for as long as a bankruptcy as well - 7-10 yrs.

2. If the debt is forgiven and you don't declare bankruptcy, you will be sent a 1099 for the ENTIRE amount forgiven. You'll probably receive a 1099 either way. So, if you were forgiven a $250,000 mortgage, it will show up as taxable income (ouch!), and you'll still receive the negative credit rating. Legislation is in the works to help relieve this, but is not approved as mentioned in an earlier post.

Also, in some states, you won't be able to purchase a home for at least 18 months to up to 3 years.

There really is no pros when you're in a DIL situation. Since it is a very difficult position to be in financially, most people have declared bankruptcy, since a DIL is just as bad.

I'm no expert...just someone who's explored the options and has done a lot of reading!

Hope this helps!

Jeff, thank you very much. It is extremely helpful and I hope that those pursuing differnt options theses days will get a chance to read your excellent write up. I really appreciate you taking the time and sharing your experience with us.

SEP

2007

I have just begun the process of selling my home as a short sale.. Reading some of these experiences are like horror stories to me!! I am current on all my payments, but my property needs to be listed for 90 days at the current amount owed before I can drop the price.. I cannot get a 'short sale' packet from my lenders (1st and 2nd mortgage...100% financing.. 70/30 loans) until I have a buyer... and then, I guess the lender(s) have to approve the buyer and comb through all of my financials and whatever else they do before approving or denying them..

I'd love to preserve my credit, as it's in the 700s right now.. however, all this sounds like I'll be paying my mortgage for another 6 months or so before all is said and done.. and that's if I even FIND a buyer down here! (Fort Lauderdale, FL)

Another issue I have, I own a condo which was my primary residence for awhile... I put it up on the market and bought my house, as the market was still racing then.. I was expecting the condo to sell quickly (this was almost 2 years ago..) well, as soon as I bought my house, the market plummeted, and my condo still hasn't sold.. It's been rented for less than what I pay for the mortgage each month, just to balance out some of the costs of it...

I'm at a point now where I'm ready to just walk away if things don't start working out with these sales.. I can definitely demonstrate hardship and the inability to pay for my mortgages now.. due to my dad's recent and very bad diagnosis of cancer, as well as the sale of the family business, which supplemented my income as a teacher... So, essentially I am losing a job as well as losing the monies that were given to me each month by my father (upon his passing..) My realtor thinks I have a decent case to present to the lenders, but reading about how hard all this is really just makes me want to give up altogether... :(

I am lucky to be in a serious relationship with someone who already has and maintains his own home... the plan is to move in with him and we'll share the costs, instead of maintaining two (well, two plus the condo) households... This will be my first time 'relinquishing control' and moving in with someone... but with all the stresses and BS that this market and current time in my life have been causing, I'm ready for something different!

Anyway, thanks to everyone who's taken the time to post here! Very informative.

Hi Alicia,

Please do not get discouraged. Thank you for sharing your situation. Absolutely do not give up. Every now and then we go through patches of hardship as you do now, but things do change and life gets better. It is great that you have someone to support you in this difficult time.

Short sale is a frustrating process because, as you said, lenders don't want to talk until you have an offer . However, once wyou have it it should take no m ore than 6 to 8 weeks to get a resolution. For your information, I am working with a few clients of mine on solutions that will not effect their credit (have you seen a comment from Bill Nazur?). It is possible, however it is not easy. One of lenders I talk to is currently in bankruptcy proceedings and thy direct all (almost) calls including those to their management team to India. After long search and tens of calls to India, I found a local executive.

Good Luck!

Alicia - Be persistent with them on sending you a application packet...have it completed and submitted saves valuable time when an offer does come in! There's no reason for them to wait until you have an offer. Once you return the packet, they'll review it, order an assessment of the property and THEN wait until you have a signed final contract to proceed to the next step. And since many buyers don't want to wait weeks to get a final decision, you'll have to press the lender to move things along. If you don't, they focus on the squeeky wheels until you press them.

Jeff, this is a great advice for Alicia and anyone else in this situation. As a matter of facts it is what short form document usually require clients to do (within 7 days of receiving short sale document from the lender). However when talked in person they alway require to have a seller first. Some clients, like Alicia, are in better situation than most to be looked differently, I think. So, thanks Jeff for your comment.

SEP

2007

Artur

I am back in town. Will call you tomorrow regarding that situation with your client. Been on the east coast for longer than expected.

Jeff

You are the model of a 'creative' situation that I've been preaching to others as a means of protecting your credit. We appreciate you. I have to tell you that I speak to several lenders and realtors, and you have exhibited more knowledge from reading and researching than 90% of the people I run into. Wanna become part of our industry.

Alicia

I don't know who your lender is, but the short sale package should be sent to you upon your request, so you can start filling out the required documents. It is true that you should not send it back until you have an offer, as the offer combined with the potential deficiency will give a real picture as to the possible deficiency, which as Jeff has recommended, does NOT need to reflect on your credit.

Bill Nazur; www.findingforeclosureexperts.com

Bill,

Thank you very much for your comments. I will call you late morning tomorrow.

SEP

2007

I appreciate the comments...hopefully, someone will benefit from my experience. I wish I had it when I was doing the research.

Bill - Great suggestion...my personal consulting can be offered for a small fee. :) Maybe I can collaborate with you and Artur on a website designed to address these issues. I would imagine the traffic would be enormous in the next 18-24 months. In my experience, I've spoken with a few non-profit credit counselors who couldn't address my questions or provide the clarity a homeowner needs during this time. Their websites are less than helpful as well.

SEP

2007

Hi Jeff,

My apology for so delayed reply. We are just launching a new service (I will have a post on that, hopefully soon). I really appreciate your comments. I definitely am interested to discuss your idea with you. In next few years many, many people can benefit from your comments. Please let me know if you would like to switch this conversation to email or phone.

OCT

2007

My husband and I bought a home about 18 months ago.. and discovered nearly $30,000 worth of foundation damage that was hid by the seller, which we are taking them to court over. In the meantime our home has to be fixed to be lived in (which we can't afford) .. so we are going to try a Short Sale. (And this blog has been very helpful with informing me on this!) If we are able to do Short Sale.. we'll probably come out oweing $25,000. My question is .. what type of term with they normally set-up the remaining balance of the loan on? Is it at the same terms as the original loan or does it vary per lender?

Thank you for your input!

Tricia,

I am sorry to hear about your and your husband problem. Thank you very much for sharing it wit us. Regarding your question, the answer is definitely lender specific. One option is that you will not have to pay and you will have to declare the difference as an income at the end of the year. This solution, however, will damage your credit. You can negotiate with lender a short term loan. It is definitely lender specific, but possible.

Thank you Artur:

When you say 'short term loan'.. how short are we talking about? 5 years?

You welcome. The definition of "short really varies. I have client who want it done within one year. But 2,3 to 5 is more likely.

OCT

2007

Tricia - From my experience, the lender is likely to extend the terms of your existing loan with the short-sale balance. So, if you have a $1500/month payment on the short mortgage with a rate of 6.5% paid over 15 years, you would simply continue to pay that amount with the same rate and repayment period...the only thing that changes is the balance you owe (understanding that your balance owed is lowered due to the sale of your house and a portion of the funds paying part of the mortgage). As Artur mentions, this could change from lender to lender.

If you can't make the $1500/month payment, then you may be able to work with the lender to pay a lower monthly payment, but that only inflates the balance you ultimately owe.

If the current interest rates today are better than the terms of your mortgage, you may want to consider taking a new loan to repay the remaining funds.

It would be rare to find a lender who would erase the funds you owe on your short loan. But if you did, they would tax those funds as income. If you were able to get a lender to erase the balance, then you were probably in a desparate situation already and were fully aware your credit was on life-support.

Hang in there...it is a tough financial situation to be in, but the lenders are more willing to work with you if you are willing to repay the short balance. They are hurting for cash due to the subprime mortgage market and may be more flexible in working with someone willing to continue paying.

Please report your progress. Thanks!

OCT

2007

Thank you Jeff.

FEB

2008

My husband and I have been relocated out of the country for his job. We have been offered $780,000 for our home, but owe $805,000. The house has been on the market for a year with little activity and this is the only offer in that time. We can't continue to pay the mortgage on this home and are considering a short sale.

The company is paying our rent while my husband works here for the next 5 years and we won't need to purchase a home until our five years are up here and we are moved back to the US.

We understand our credit will be affected, but my main concern is our ability to buy a home in 5 years when we are relocated back to the US. Will we have mortgage lender options or is an FHA the only option we will be offered?

MAR

2008

My wife and I are going through this now. Technically, we are doing a short sale, but we will be arranging a promissary note for the remaining balance. This does not affect your FICO score since the terms will be the same until the remaining balance is paid in full.

It was extremely beneficial to read everyone's experiences and comments.

P.S. The idea for website would do extremely well in this time of need!!

MAR

2008

Hi Todd,

A promissory note definitely should help and you should not lose additional points from your FICO. However, your FICO might already be damaged. Usually lenders don't want to discuss a short sale unless borrower is already in default on one or more mortgage payments. Was it the situation in your case? If yes, make sure that you discuss it with your lender and ask them to remove late payments report(s) to credit companies.

MAR

2008

Artur

First, let me express (along with everyone else) how useful the information provided has been. I have been doing research for some time and information is not always consistent. A lot of people think they know what they are talking about. This site is great!

I currently own a home that is valued less than what I owe on the loan by about 50K. I want to sell, but not because I can't afford the payments, but because I want to upgrade to a bigger home. Although I can make it now, my loan is set to adjust in October and it will be more unrealistic. My FICO score is important to me since I have worked so hard to get it to where it is. For personal reasons, I feel I could get the lender to approve a short-sale, especially considering that I could pay the remaining balance, allowing me to buy again in the near future with no problem.

Can I negotiate paying less than the remaining balance with the lender without it affecting my credit score? Or, does this mean it would be listed on my credit reports as "settled for less than full balance" and hurt my credit anyway. According to Jeff, if I can get the short-sale approved and I don't miss payments, it will not affect my score. David stated that the lenders would report "settled for less..." to the bureaus regardless, which would lower my score anyway. Please provide some clarity on, if there is a short-sale with no payment of remaining balance, does this differ from short-sale with arrangements of paying remaining balance in terms of how it is reported to bureaus? I want to protect my credit and not limit my options, but I also want to avoid paying in excess if I can avoid it.

I liked Jeff's idea of approaching the second mortgage lender so that the first is not affected and paid in full. My major concerns are regarding how all of these arrangements get reported, and how this would affect my score & future buying ability.

There have been enough experts on-line to give me guidance, please help...

Max

Max,

Thank you very much for your comments. Regarding your question, it really depends on the lender. Some will not talk you about short sale at all unless you miss a payment or two. In such situation, by the time your short sale is approved, your credit is already damaged - even if you agree to repay. At the same time lenders are becoming more and more overwhelmed with the amount of defaults and potential foreclosure they deal. While my experience doesn't confirm it, I heard from a few colleagues that Loan Mitigation departments are starting to do more for clients to prevent foreclosures. After all it might be much less expensive comparing with foreclosure, unsuccessful auction an then need to sell to wholesalers for 10c on a dollar. Coming back to the subject - the only way to know is to talk to you lender. It is in their best interest to help you. A lot of people started to opt for "deed in lieu of foreclosure". There is even a San Diego company doing it for clients for approx. $900. Let us know how you managed with your lender. We all would really appreciate it. Good luck.

MAR

2008

I am considering a short sale for my rental property. This has been vacant for last six months and keeping on making monthly mortgage is hurting me in terms of debt. Monthly mortgage is about $3400/-.

I have engaged the services of a short seller and he has advised that I should keep other things current and stop making payments (since I am borrowing to make mortgage payments). This will hurt my credit but will not be so damaging since I will be current on other payments.

I own a total of 5 homes including my primary residence and 4 rentals. Do you know if I stop making mortgage payment on one rental (which I talked above) how will it impact my credit in short term and also in the long term. I would appreciate if you can provide approximately how many points. Also, my primary residence will be due for refinancing in 2010 how will it impact my ability to refinance. My credit score right now is about 750.

I am glad that you call me directly. As I mentioned a thing to watch are tax implications of a short sale. The fact that you lost money, doesn't mean that you will not get 1099 at the end of the calendar year from the lender and you might have to pay an income tax on the difference "forgiven" by your lender. While you might get lucky and the lender might "forget" to send you one, check with tour CPA (experienced in tax implications of short sales) before you go this path. According to other entries in this blog, the FICO score penalty for short sales is 150 point vs. 300 for foreclosure. I have just received an email from "myFICO", the owners of the FICO algorithm, stating that there is no difference and that both are treated the same regarding the lose of FICO points. I don't have a way to verify it. As a matter of fact, I will post this question to other "activerainers".

The recovery of 150 points might happen within 12 to 18. Lose of 300, would take substantially longer to recover.

MAR

2008

Hi! First off, thanks to everyone for all their great questions and responses! It has been really informative.

I have a question about a short sale that my husband and I are in the process of doing. We built a home in 2005 and took out a VA insured loan. 8 months ago we relocated out of state for his job. When we first put our house on the market we owed more than it was worth but would have been able to pay the difference at closing. While we were waiting for our house to sell the market kept going down. We have lost about 25% of value in our home and cannot come up with the new amount that will be needed to close. We contacted the VA and they told us we had 2 options. We could either do a deed in lieu of foreclosure or a short sale. The VA will pay our mortgage company the difference in what is owed vs. what it sold for and all reasonable fees. We do not pay the VA back unless we ever want to us our benefits again. The VA also does not report this to the credit agencies. We were told that mortgage companies usually report this as "compromise sale paid in full". So my question is how will this impact my credit score? Also, since the VA is paying the difference is it possible to get the mortgage company to not write anything at all? How long until you can get a mortgage again after doing a short sale? I guess that was three questions! We are current with all our mortgage payments too.

Thanks in advance!

Hi Krista,

If I understand it correctly, VA would pay the difference to the mortgage company. If that's correct - you will not get the 1099 from the lender for the difference, as you will not anything from the. Assuming that VA will not send you 1099 and I believe that they would not, your credit should not be affected at all and you should be able to apply for mortgage immediately after your sale is completed. Of course you will not be able to receive another VA loan unless you repay the difference.

I am glad that you found this post useful.

MAR

2008

Okay - first I want to respond to Krista - We are in a similar situation. We would like to do a short sale and the bank thought we had VA insurance. So I called them. They told me if we did a short sale - we would owe them the money. They would not garnish my husband's active duty wages but any tax return or entitilements we would get they would take until that amt was paid. Come to find out we have private mortgage insurance through another company, I called them and discussed the short sale. They basically said in summary - if anyone helps cover the mortgage that the sale did not cover then you will have to possibly pay that money back. So even though the sale is over you will still have money you owe.

This is so frustrating and people (banks / agents) do not want to explain excatly what will happen - i think because they really do not know.

Hi MD,

Thank you for sharing your story with us. It is unfortunate that VA guarantee works against you. It looks as VA ties future benefits to payoff of the difference. It looks to me that someone might want to challenge it. Thus, they penalize you more that home owners with no guarantee! After all, per December 2007 decree home owners, neither have to repay the difference for selling their residences short, nor will be taxed on receiving 1099 for the difference.

MAR

2008

I called Countrywide today to ask about the credit hit on a short sale and of course they couldn't tell me. Is it generally agreed upon that the hit is 150 points? How long will it take to recover that? Right now I'm at about 710. They did tell me however that a law passed in January so the shortage is not taxable anymore. Is that true?

Thanks!

Hi Steve,

150 points drop is not "a science". It is difficult really to predict the exact amount. One way to find out is to simulate the impact of short sale. For examole, CalCoastCredit company I am using for checking my clients credits score has a service that helps to analyze the impact of different actions, such as additional payment or effects of late payments.

The difference between the loan amount and the sale amount is not taxable at this time (since December), if a property is your primary residence. It is taxable for investment properties.

MAR

2008

Can you advise on a mortgage company that will allow to carry the balance you owe to another mortgage. Due to a divorce, I am currently in a home that I cannot afford. I have good credit and am current on my mortgage payments, however I am concerned that if I do not sell soon I will not be able to keep it up. If I sell now I will be upside down on my mortgage $10,000. I have found a home more in my price range that is selling for $25,000 less than what it appraises for. I was wondering if there are any morgage companies out there that would allow me to finance the $10,000 into my next home. Also, if a mortgage waives your pre-payment penalty (mine is $5000), will that show up on your credit? Thank you!

Hi Lee,

Please help me to understand your question better. If you sell now - I presume it would have to be a short sale. By the way, lenders don't let you to apply for a short sale, unless you miss your monthly payment(s) and this automatically would sppoil your FICO score and prevent you from applying for a new loan at the present time. Also, if you don't have equity, you will not be able to put any money from the current sale towards the new purchase. If your lender waives any funds (including prepayment penalty) it will most likely show on your credit.

What you might want to do is to negotiate with your current lender repayment of the difference over the period of several years. In such case, your credit will not be affected and also you can ask them for additional $10k for down payment. It is definitely worth to call the Loss Mitigation Department of your lender, explain the situation and ask them for help. They might be able to come up with a solution for you as it is in their best interest that you don't default on your loan.

MAR

2008

MD,

Hi! When you said you thought you had a VA guaranteed loan did you call the bank or the VA? We called the VA directly and got the response that I had previously stated. They have been extremely helpful in answering a lot of our questions. Unfortunately they can't really tell us what will happen to our credit because that will be up to the mortgage company. I do know that you have to sign a promissory note on a VA loan if you took it out on or before December 31, 1989. Here is the link to the Roanoke Regional VA info on Compromise sale http://www.vba.va.gov/ro/roanoke/rlc/forms/Compromise%20Sale%20Program.pdf . I'm not for sure this will help anyone since that is a different region. I am actually from Virginia but stumbled upon this page through a web search. Anyway, I know you said you didn't have VA loan, but maybe this information can help someone else. We went ahead and are attempting a short sale. I don't mind paying back the difference just as long as we can sale our house!

I don't think it should have a negative impact on theirn fica Score as long as they are not late. Of course their are tax problems . I hope the federal goverment considers giving a break to shortsales

Krista, Thank you very much for sharing information with us.

Daniel, thank you for your comments. For your information - home owners are not charge income tax for the difference on short sale for primary residence since December last year.

APR

2008

My experience....

Short sale in July of 2007. Agreed with and signed a promissory not for the difference between what I owed on the house and what I sold it for (13,000).

I received a 1099 for the "forgiven" amount. Not sure how they think they forgave me when I am paying 220.00 per month to pay back the difference.

I couldn't get a loan if my life depended upon it now. I have no late payments or anything negative on my credit except the short sale. I have never been late on any payment ever in my life but now.....I can't get a loan and until 2014 the short sale will remain on my credit history.

Don't believe anything the mortgage company or real estate agent tells you because during this whole process I was reasured more than a couple of times that I wouldn't get a 1099 and this wouldn't affect my credit. Not true at all....

One more thing....if you have any "overage" in your escrow account...kiss it goodbye, the mortgage company will keep it.

Interesting details about a concept that has recently gained a lot of steam. I may have missed it, but I'd be interested to know how quick the credit score can recover from the 150 point drop after a short sale - vs the "seven year" drag that I hear is blackmarked against credit after a foreclosure.

Lee, thank you very much for sharing your story. It is very disturbing. You definitely should not have received 1099. First - as you said- it not forgiven because you agreed to pay a difference. Second, assuming that it was tour residence, you should not be paying anyway as a result of the December 2007 legislation protecting home owners from being issued 1099 for the short sale difference.

You definitely should contact your lender and have it cleared. They should not only reverse it, but report it back to credit agencies to reverse the FICO score penalty. I know it is very frustrating. Lenders are quite "stretched" these days and their staff is not always up to date on things they should,

What did you mean by the "overage" on escrow account and lender keeping it?

Chris, I think that you could improve it with a year two year and half assuming that your all other payments are made on time.

Anyone else has an opinion?

APR

2008

Hi to all.Acctually we baught a house.It was our first house and we never realized that it will be not big enough for our family.And we cant manage with mortagage.i want to know if we go for short term sale for our house.How many year it will effect our credit.And how much compare to fourclouser.And when we will be able to buy a house again.

for how many years short term sale can effect the credit score and can buy house again.Please let me know.

Hi "Unknown",

You definitely can sell the house and if its value is smaller than your obligations - try to sell it short. You need to contact your lender first and make sure that you understand their short sale requirements. For example, that you need to miss at least one payment, describe your specific situation and explain why you cannot make payments. You might want to find a real estate agent experienced with short sales to help you to go through this complex process. Regarding how long it will effect your credit - assuming that all other payment are made on time it might take on year and half or more dependent on you specific situation.

hi S EJAZ,

Please see the answer above.

APR

2008

Great information here. I have the opportunity to transfer to Australia. My loan payment are up to date, house is worth 330-340k and I owe 380. With every month it getting worse, I can't rent it near the payment of 3k a month and considering short selling. I have all the short sell infomation I need from the comments. but was wondering if I Should consider selling and paying off 1st trust of 300 and whatever is left to 2nd trust and working out a promissory note for what is left on 2nd trust.

What worries me is this sure would spook a buyer and 2nd trust is a HELOC that helped me avoid PMI. 1st trust is a fixed 30 yr at 6.7.

Or should I just short sell and take my lumps (150pts) and walk away. I only have about 6 months to formulate a plan and move on it.

I keep hearing about negative equity certificates in the news, should I wait? I wonder when foreclosures keep rising if banks would consider refi to current fair market values.

Thanks,

Will

Will, great questions.

Your first option might be difficult to execute. The current value is smaller, so buyers have a choice. In other words it might be difficult to find anyone to pay this price.

Short sale is definitely an option.

Refi is, at least for now, out of the question with negative amortization.

I think your options are either to hold on to the property or do short sale. Do simple calculations where you might be financially with either option. Make different assumptions on what prices might be 5, 10 and 20 years from now. Once you have hard numbbers to look at it will be easier to make a decision.

I have a similar story as all of the above..but I am still confused as to what the real implications are! I am a single mom, purchased this home in 2005 as my primary residence. My mortgage is $5200 per month, I have never been late but because of a job change I am finding myself in a very difficult financial state. To stay afloat, my credit cards are maxed, which I have been very proud to say I have been debt free(credit card) until the last 12 months, I am to the point that I am considering walking away, short sale, BK..not sure what to do. I make too much money not to have a home as a deduction, and too little these days to stay in the home. I am in San Diego and the market here is horrible, people are dropping their pants like crazy...homes in my neighborhood are selling for $100-$200k less than purchase....

I am trying to work with the lender to remedy the situation. ...Anybody looking for a room for rent?

Seriously....what are the real implications with a short sale? FICO Drops? Taxed on what? the difference between what the house was purchased fro and the sale price? or the amount owed? Is there a web site that will tell me if Bush has received approval yet?

I definitely suggest to anyone that is considering a short sale to talk to their tax attorney before they do a short sale. There are so many different things that can happen when you do a short sale.

Hi xxx, thank you for sharing your information. I am very sorry about the hardship you are going through. Cheryl is right. It is definitely a good idea to talk to CPA or tax attorney.

Regarding FICO score, you mentioned that you maxed out your credit cards. Just doing that most likely dropped your score to 620-640 level. So in your case, unfortunately, further FICO drop might not be so severe (it will be most likely m7ch less that 150 points. This way or another it will take 1.5 to 2 years to improve it. by the way, there are simulation programs that can help you to estimate the FICO score impact of different payment decisions. You will not be taxed on the difference between the sale price and your due amount to lender(s), as the house is your residence.

You need to do do some purely mathematical calculations, to see what financial impact the sale of the house will have on you 5, 10 and more years from now. You should analyze several scenarios, such as holding to the house, selling short, walking away from the house (deed in lieu of foreclosure will have on you) Once you have facts 'at hand" it is easier to go through this emotional decision.

Good luck and feel free to ask any questions you might have. Make sure that you ask many experts, as CPA, financial planner, real estate professional will give you different perspective. At the end it is your decision.

Thank you Cheryl for your comment.

APR

2008

Maybe it's just our unfortunate luck with Wells Fargo, but we did a VA Compromise Claim on our home in Michigan last August, as my husband was being transferred to NC for his job. Long story short......our credit has absolutely been ruined. No mortgage companies will touch us, as Wells Fargo has reported this as "Paid in settlement - Never late; Account legally paid in full for less than full balance". We don't understand how they can legally report it this way, as they received all their money between the sale & the VA.

Not sure if our next step is to consult a real estate attorney or not. We're not sure they can report the sale this way.

So, do your homework before going the compromise route. I'm sorry we did it.

Melissa

Oops - tried to edit my post above. My name obviously isn't "Beware of VA Compromise Reporting"! Sorry about that!

Melissa

Melissa, thank you very much for your post. I am sorry about your experience. What did VA tell you prior to the sale (I am assuming that it was a "short sale"). What were your expectations? How much did your FICO score drop as a result of filing? Getting a feedback form an experience lawyer makes a lot of sense.

MAY

2008

This blog has been very informative!

I'm trying to figure out the best thing to do for our situation. We are in bad shape financially now. We got 2 months behind on our house payments, and are currently in a repayment plan. I only agreed to the repayment plan out of desperation, in hopes that I could get money out of my 401K to get us caught up. However, it looks like that might not be an option now. My mortgage payments are normally $1200, but they are going to be $1700 until August, as per the repayment plan. Also, our credit cards are maxed and are at high intrest rates. We are also behind on almost all payments (including "regular" bills). We also have a loan out for $7,000 that I got due to maternity leave. Those payments are $240/month and are currently current, because they come out automatically. Our bank account got extremely bad last week, as it was approx. negative ~$2100. It's now back on the positive side, but there is only about $75 in the account now, and we don't get paid for another 2 weeks. I'm hoping to get the tax stimulus payment ASAP so we can surrive for a little while, and make some payments on bills.

I'm not really sure what the best thing would be to help us get out of this situation. We currently owe more on our home that we could sell it for. Plus, it's a condo, and those are not selling right now. Our neighbor has had hers on the market for over 1 1/2 years, with no luck. Also, our loan is a VA loan.

Any suggestions would be greatly appreciated.

I forgot to mention that we are also about 6 months behind on our condo fees and haven't paid the yearly subdivision fee that was due Jan 1st.

MAY

2008

Hi Melanie,

Thank you for sharing with us your situation. I am very sorry about the hardship you are going through. Let me ask you a few questions to better understand your situation. I am assuming that you got into this because one of you lost the job. If this is true, what are the chances of getting your previous income back? It is very difficult to advise anything without having a full picture of your situation. Additionally, yo need advise from a few professional, an agent, mortgage specialist and CPA. Have you tried to talk to anyone about the current value of the condo? You need to think if it makes sense to hold on to the condo. How many years it might take for values to give you a positive equity. I am assuming that you talk to your lender and it is how you got yourself to the repayment plan. Have you talked to them about the change of the mortgage? You need to put all options on the table, such as refinancing, short sale, foreclosure, deed in lieu of foreclosure and possibly others. Have you contacted your City regarding possible help? Keep exploring your options and asking questions.

Artur, thanks for your response!

There was no job loss for either my husband or I. When we initially bought the condo, we "bit off more than we could chew" however we were able to barely hang in there. Then, after a year or so, our payment increased ~$300 month because of the taxes that we didn't pay from the first year (it was a new development, so the taxes were based on land alone). That increase hurt us pretty badly. We started getting behind on all of our other payments, in order to stay current on our mortgage. We never had a late mortagage payment (more than 30 days) until after the increase. The increase started April 2007. We were doing ok on making mortagage payments until Jan. 2008 (we were late on other bills in order to keep Wour mortgage current). We didn't make a payment for January or March. We then made 1 payment in April (5 days late), and at that time was when we agreed to the payment plan. My maternity leave started mid August 2007 and I only received 60% pay for 5 weeks. The remaining 6 weeks, I didn't get paid at all. Towards the end of maternity leave, I got one of those checks in the mail for "instant" money. I ended cashing it, and then turning it into a "real" loan, instead of revolving credit. That helped us, but it wasn't enough to get us back on our feet. On top of that, I'm going to have to start paying for daycare for both children, which will be about $300/week.

I hope I didn't over explain myself, but I though it might help to give a bigge picture of our situation. I've considered talking to a CPA, but have NO spare money to do so. I am at the end of the rope, and have nowhere to turn.

Thanks for your help!

Hi Melanie,

Thank you very much for sharing your situation with us. Have your read an article in you local newspaper on government helping to stave off foreclosures? This is a link to the San Francisco Chronicle article: Government plan to help avoid foreclosures. It has 800# to call and a list of nonprofit counseling agencies in California that might offer help. Look for similar information in your area (nothing beats Google to search for it). Dependent on who your lender is and a type of loan you have they might provide you with advice and/or help. Also, you should talk to your lender again, but you should have at least 2 sources of information. The lender is primarily interested in saving its investment and might be able to help you, but it might not be the best option for you. The help is out there. Every now and then you can find a CPA or lawyer who can help you pro bono. Don't forget to call your CITy Hall and ask if they can help or direct you to someone who might help.

MAY

2008

Thanks Artur, you are wonderful!

You welcome.

When I do loans and have to explain that the 120 day late is NOT a foreclosure it is a short sale, it is tough to sell it. So, if I were them, I would contact the hope hotline www.995hope.org They are WONDERFUL they helped me out with my situation and I know they can help anyone out without having to do a short sale, foreclosure or a bankruptcy. Honestly, if they don't want to work it out, the best way to do it is a bankruptcy-Chapter 7 and let it all go. Because a short sale and a foreclosure is going to hurt even worse than a Chapter 7 to wipe everything out. Chapter 7 boosts scores by taking away the "pain"

Thank you Jennifer for your input. Unfortunately, it is true that short sales are difficult. Buyers often believe that they can better a better price through foreclosure, while most of the time (not always) the short sale is the best opportunity to buy a property 10 to 20% below the market value. Also lenders are not making short sales easier, while in a current market situation in most locations with high number of foreclosures, short sale is a best deal for a lender as well. Saying that foreclosure, personal bankruptcy or deed in lieu of foreclosure might be a better options for Melanie. She has to research different options and compare their cost and impact to be able to choose the right one for her. Short sale might work, but might not be a right solution for Melanie. Once she understands different options it will be easier to determine which will work best for her.

This is my take on foreclosure and bankrupcy 'in general".. There are exceptions to every rule, and every situation is different.

In my experience, bankruptcy is a better route than foreclosure, if a shortsale can't be negotiated.

With bankruptcy, in most cases, you're pretty much wiping the slate clean, and with little or no debt remaining, you have a better chance of keeping the home.

Many people facing foreclosure have already damaged their credit. In the hierarchy of monthly expenses, the mortgage is typically the last thing that someone would pay late, .... so it's safe to assume that someone in foreclosure has already become late on most of their other bills before paying the mortgage late, or not at all.

Someone with bankruptcy will have offers to rebuild their credit almost immediately after the bankruptcy is discharged. There are many ways to significantly rebuild credit in the first 12-18 months. Foreclosure seems to be the kiss of death because it looms for at least 4 - 5 years if you're trying to get a new mortgage. Not to mention, the bad credit other than the foreclosure still shows up for years to come.

There is a strong case to be made for filing bankruptcy if you can financially afford the house after other debts are discharged.... and if you want to remain there.

Also, filing bankruptcy typically delays foreclosure by another 90+ days. This will give you some breathing room and really allow you to take a detailed look at all of your options.

David, thank you very much for your excellent input on bankruptcy versus foreclosure. How expensive is to file for bankruptcy? Obviously one needs legal advice and support. Also, what are limitations for filling bankruptcy?

Thanks Jennifer and David!

Jennifer, A short sale is worse than a Chapter 7 bankruptcy? How much does a chapter 7 change your credit?

David, Unfortunately, due to daycare changes, we won't even be able to afford our regular mortgage payments. We don't mind giving up the condo. We can always find a less expensive place to rent, and try to rebuild our credit. I'm trying to do what is least damaging to our credit, but helps us at the same time. I realize there is no good solution, except winning the lotto. :) You are correct on your assumption about being behind on other bills.

PERFECT TIMING for your blog Artur. I have a client that needs to sell quick to head off a foreclosure and thinks that a "short sale" is a quick way to sell his house for less...then rent a while and buy again in a couple of years. I'll can properly educate him now.

Disclaimer**** if you're looking at bankruptcy as an option, be sure to talk to an attorney.

Regarding bankruptcy in my area (Seattle) personal bankruptcy fees for an Attorney are in the area of $1300 - $1500 for simple bankruptcy, maybe $2500 for more complex stuff.

Court fees are another $250-$800 in this area.

I've also seen bankruptcy services that charge as little as $250 for helping you file the paperwork, but they don't offer any help in cleaning up bad information on your credit after bankruptcy.

A good lawyer helps you before and after bankruptcy. Making sure your credit is accurate after bankruptcy is every bit as important as having good help in filing for bankruptcy.

Obviously how we spend money is important to all of us. You might also look for a "flat fee" bankruptcy attorney that charges just one set fee for filing. Definitely research 2 or 3 attorneys to compare the level of service that they can offer, as well as compare their fee structure.

Also, this is my 2 cents...

Do what is best for your family in terms of relieving financial stress and giving you the best quality of life.

Your credit score is not the most important thing here. Your family is.

The creditors that gave you credit did nothing more than use a computer program (FICO) to determine whether or not you were a safe bet. They set up their pools of credit accounts with the full understanding that some people will not be able to pay back. It's all part of their business model. Don't feel that because you are unable to pay a credit card that someone that you're personally letting someone down.

Banks only care about numbers, that's why they set up automated systems to answer your questions, and that's why the fee structures and interest rates that they have are only set up to benefit them.

Do what you feel you can do reasonably.

Potentially 3 or 5 years of stress trying to pay back these debts and not be able to give sufficient time to your family is a big trade off to make for the sake of having a good credit score.

Bankruptcy, shortsale, foreclosure, whatever. Life will go on. The best thing you can do is learn from the experience and try not to ever have this happen again.

Hi David, thank you. While I believe that short sale is a good opportunity for buyers and lenders as well, lenders don't seem to share this opinion. They seem to think that it is better to take over and offer it themselves themselves as REO property at the market value. However, with a few notable exceptions, if lenders were able to sale short in 3 months instead to foreclose it in 6 to 9 months they would save a tone of money. It is a very simple calculation. For whatever reason, short sales are still a low priority for most lenders and, unfortunately, they are treated like low priority.

But coming back to your comment, short sales are very painful. They can help some sellers, but certainly cannot help to save the credit rating. You cannot even apply for short sale unless you missed at least one payment. So, sellers have to think about what make sense for them.

Thank David (Mordue) for another great input. It is so timely for so many people. This is what I was just trying to say in my reply to David Bolick. Putting a band aid might not be a good solution. Thank you very, very much for your comment.

True.

Banks having to spend money to lose money (shortsale) is against everything that banks stand for.

The banks put priority on the shortsales where they do the least work. The people in charge of short sales are evaluated based on the number that are completed, and not so much the amount of money that a shortsale might save the bank. There's no set formula since banks often have REO in many markets.

I think they prioritize the foreclosures that actually have positive equity, and then work on everything else.

There definitely are a lot of foreclosures with positive equity right now because people are not able to qualify to refinance their mortgages before their payments adjust.

It's not just mortgage rates that are the cause though, it's spending habits. Many homeowners bought a lt of things on credit after they got their home and that is a big factor in why they cannot qualify now.

Hopefully spending negative habits will begin to change as a result of this economic cycle.

It's great to see how much activity this thread has had. It's been up for over 6 months, I think and still serves to educate a lot of people.

David, your explanation makes a lot of sense. I couldn't make sense out of lenders unwillingness to do short sales, maybe because I have not seen very many short sales with a positive equity. However, obviously, there are some. You are very right about spending habits. We really got hooked to credit cards and the equity. I talked to a Citibank manager who worried that many of his refinancing clients still were planning vacations in Europe not fully understanding that they not only might not be able to refinance, but be out of the house by summer! It is very hard for many people.

MAY

2008

Great discussion you have going here Artur. I combed over a few comments and didn't see this link about the Debt Forgiveness Act that was introduced this year.

I am reading everywhere a different answer about the impact on the FICO scores. The only reasoning I can come up with would be a Foreclosures impact would be higher since the homeowner most likely missed payments for an extended period of time thus reducing more than a short sale. I guess it would be individually calculated.

I have to tend to agree with David Mordue....don't worry about what it is...just get out the situation that is causing so much pain and stress to the family now and pick up the pieces later.

Thank you very much for the comment and the link to the IRS information about the Debt Forgiveness Act . It was mentioned several times, but you are right we missed the link. You are absolutely right regarding the impact of short sales and foreclosures. It is very individual and difficult to generalize.

MAY

2008

This site has been EXTREMELY helpful and thanks to all that have shared their stories!!!

My husband and I currently have our house on the market as a short sale and the biggest problem that I have found is getting information on what happens next! I am very nervous about the whole thing and worried about the impact on our future. There are several points that I want to share:

#1- Anything that the bank tells you try to get it in writing.

#2- Don't go by what your real estate agent tells you (many times they don't even understand the process and do they really have your best interest at heart?)

#3 -Also another thing that I have not heard mentioned our real estate agent referred us to an attorney who is handling our short sale (once we get a contract). I know that you are thinking how much will this cost??? They negotiate the fee with the bank at settlement and it does not come out of our pocket. Please research this in your area. I believe that they get 1% of the loan. We were worried about the real estate agent dropping the price of the house (which is what they do) however a short sale is a short sale no matter how short the sale is! Time is of the essence to avoid foreclosure....

In our case we were current on our payments and were advised to stop making payments because our mortgage company would have a hard time approving a short sale if we were current. I have negotiated with my lender to stop reporting it to the credit bureau and they claim that they have turned it off. Some lenders will defer payments.

My advice:PRAY, ASK QUESTIONS ,AND OFCOURSE DO WHAT IS IN THE BEST INTEREST OF YOUR FAMILY- This is what has gives me hope J

Now for my questions...

Has anyone tried to/or have purchased a home after the short sale? I am not sure how this will work and what lenders will think... We can't afford not to own a home (for tax purposes) and we are considering renting for a year paying off our debt and then purchasing another home. Will this be hard to do? Also how much will this impact us and perhaps could it be hard to rent? What will it take to recover from this???

Please advise......

Lola,

Thank you for sharing your experience. You are right, asking question is the key to making sure that you have all the facts and can make decision that will work for you.

Regarding your question, you mentioned that you managed to negotiate that your credit will not be the case. If your credit is (will be) OK, there will be no problem to buy another property. Foreclosure would effect your ability to do so for some time. Short sale does it for limited time or not at all if you credit was not effected. If your credit is effected it is possible to repair it within 1 and haf year (approxuimately, of course).

Well it will still be on my credit as a "settlement" or whatever they call it on the credit report as a short sale. What my first lender has done is stopped the reporting it as late to the credit bureau however the second mort has not agreed to that so there will be credit implications on us. Sorry if I mis-spoke in my explanantion. So I still have the same concerns as the other people....The other thing I wanted to mention depending on your job a foreclosure could affect job opportunities as well if you need a clearance for example..

Thank you for your promt response you are really a blessing to take the time to do this!!!!!!

You welcome Lola. The difficulty of forecasting what is going to happen to the FICO score lays in the fact that everything we can do is to speculate. No one really knows the FICO algorithm, as is it well protected intelectual property of the Fair Isaac company. There is a lot of approximations (for example Cal Coast Credit company has a simulator which allows you to simulate what might happen to your credit score based on payment and pay-off actions you might take. My forecast that it might take you 1 and half year to rebuild the credit is based on assumption that your FICO score will not get lower than 600 (plus/monus) points. That assumes that from that point on you would be doing all payments on time and you keep your balances of your credit cards low. What we know for sure is that a short sale damages credit much less than a foreclosure and that the fact that "you stopped bleeding" with first lender is protecting the score from further damage (at least for one lender). Anythung else is a speculation and ite really depends on the all components of your FICO score. Also, as you probably read in other postings in this blog, sometimes - filing for personal bankruptcy might be the fastest way to rebuild the credit. Of course - it is not a solution for everyone. regarding rental - yest the low FICO score might pose a problem. Landlords do check credit reports. What you might want to do is to get a letter from your lender commending you on the way you handle the problem and you coul present it to your future landlord. It is easier to convince people that computer algorithms that are simply "heartless".

MAY

2008

Please check this story on Power of Human Spirit, Honesty and Ingenuity. It is sad, like many others in this post, but also it is a wonderful example aof a human spirit and preserverance.

Good news: Senate panel passes housing rescue plan. The plan might enable home owners facing foreclosures to refinance.

MAY

2008

I know this has been discussed at great lengths, but the answers are all over the place. I am doing a short sale and my lender agreed to work with me. My scenario is a little different than most peoples. I set up my escrow to include my taxes. I was told my taxes were included in my monthly payment. For 3 years I made my payment. I would call in every year and ask why my payment hasn't changed since my taxes changed a few dollars here and there. They assured me that they were included in my monthly payment. This past February I get a letter in the mail that essentially said, "Oops, we have been paying your taxes for 3 years and forgot to charge you for them. Please include $15K in your March payment." You can see the problem. Their resolution was to spread it out over 3 years thus raising my payment $400 a month. I can't afford this especially since I recently got layed off and rehired (with the same company) at 60% my previous salary.

1) We have never missed a payment, about how many points will I lose on my FICO? Still 150 like so many have stated.

2) I was told it will report on my credit report as "Account paid, less than owed" How long will that stay on my credit report? I am being told a year by my realtor, but he is a little loopy.

3) Maybe this was mentioned and I missed it, but didn't they pass a bill in late 2007 that said a borrower wont have to pay taxes on the amount of debt forgiven on the 1099?

4) Does the amount of debt forgiven have any baring on how much the FICO score drops? I owe about $251K with all taxes, pre-payment penalties, principal, etc. My home just got appraised at $216K. We have an offer for $170K so that would be about $90K loss assuming about $10K of that $170K goes to fees and such.

5) What percentage do lenders need before they accept? I have been told 78% of the appraised value BUT it varys on the different markets. I am in Tampa, a pretty crappy market.

Kyle....man....I feel for ya! That's terrible! The only thing I can say about such an event as a real estate broker for 34 years....you HAVE to deal with reputable lenders and not these fly-by-night type 3rd party brokers that don't take care of business.

You definitely ought to check with Legal Aide in your state/city and see if some remedy can be worked out here. It's not right to put you in that position. They are at fault.

Kyle, I am really sorry for you abou that and as david said you need a legal help. I would go for an experience and succsful real estate lawyer. Even if you owe this money they have to work with you and come up with a payment plan. After all it is their mistake and you cannot expect to put $15k on the table on a moment's note.

Answering your questions:

1. It is difficult too say how much points your FICO drop. Just missing a single payment can cost you 60-100points. So make sure that you continue payments the way you were doing for last three year. At the same time, write a letter to them (or have you laywer do it - he might ghave a better advice by the way)requesting a payment plan. They should not be reporting it to credit bureau for noe (as there is no lehal agreement for you to come up with $15k by tomorrow, even if you owe it to them). Once you reach a payment agreement and miss a payment they might or might not report it to credit bueraus. If by any chance your FICO score have already dropped since March) they will have to reverse it. Again - it is not your fault and you have not missed (I assume) a single scheduled payment to them)

2. This is for lawyer to discuss. I don't think that you should be penalized.

3. That's correct - in December 2007. It is called Forgivness Act. Here is the link: Fact Sheet: The Mortgage Forgiveness Debt Relief Act of 2007

4. I wanted to say that it is not - but to be honest with you, I really don't know. Does anyone can answer this question?

5. It really differs from market to market. If you assume good house conditions and "average" market conditions - whatever it means, the rule of the thumb is 80-90% of the Fair Market Value, so you should be OK. Unfortunately, some lenders are really confused and use out of the area appraiser to do the BPO appraisal. In such cas you really don't know what value they will use to make a decision.

Hope it helps and good luck.

MAY

2008

What an educational thread! Everyone considering short-sale needs to read this.

My situation: I am a professional graduate student with a family of four, exceptional (750+) FICO scores, and a 1st and 2nd mortgage (80/15) on a home that I paid $280K for that is now valued at around $210K. I have been near anal-retentive with keeping my credit clean, but I am now strongly considering a short-sale or some other action to help.

I am not currently working and I am commuting over 1 hour each way to school. We've always wanted to move closer to school but the fact that we owe more than our home is worth has kept us from doing so. Today, after witnessing that my homebuilder has slashed the prices on new builds in our community even more (I live in the PHX area) I am about ready to give up. I am in the beginning (education) stages of the process, but would appreciate any pointers or advice.

MAY

2008

Thank you Bonobo. I am glad that you found it interesting.

Of course I am not in a position to give you advice. You and your family have to make a decision based on facts as welll as on your priorities. Try to think for a second about yor house as purely an investment. How many years will it take to make any profit from your existing investment? Let say, 5 years from now your house might be worth $320k and after you sell it at that time you break even. How about if sell your house now and use the difference between your mortgage you are paying today and future rent to invest (analyze different type of investmens from a CD, to a mutual funds, oil stock - just name it. Where are you going to be financially 5 year from now? Will yo be better of? Once you understand a financial side, add to it your personal life, things like amount of stress, your family life, future of your children. It might become a no brainer. Real estate is a great investment if you painlesly can go through a hard time and weather market storms. In 20 years you might find that your current investment was not that bad investment after all and you would make some money at the end. But you have to make sure that it will not cost you personal hardship that might not be reversable.

Anyway, I became a little bit philosophical. This was not really the intent. You are the only one who can do the analysis and make the right decision. Credit score is important, but certainly its valu has its limits. I wish you all the best. One more thing. Don't confuse a strategic decision that might require stepping back with implementation of your plans for a time being with giving up. It definitely has nothing to do with giving up. Sometimes we have to change our priorities.

MAY

2008

I didn't read through all of your comments (congrats on so much feedback!) but I learned yesterday that the difference between what is owed on the loan and what is forgiven by the bank is no longer taxable income for the seller.

Thank you Tori. You are right regarding the difference. You don't have to pay if the property is your residence (The Mortgage Forgiveness Debt Relief Act of 2007).

Thanks for the post and to everyone the comments were also very informative

Thank you Doris for stopping by. I am glad that you found information useful. I am really greateful to everyone who contributed information, especially to those who went through the hardship or going through short sale. Your experience is very helpful and I am getting quite a few calls and emails, either asking for information and thanking fo the post. IT WOULDN'T BE POSSIBLE WITHOUT ALL OF YOU.

Great dialog! It seems I have more and more clients inquiring about Short Sales. Thanks- LauraDee

MAY

2008

Thank you Laura. I am talking to quite a few "Loss and Mitigation Departments" these days and there is a growing interest among lenders in improving the efficiency of the short sale process among them. As the # of foreclosures is going to stay high for next several years as due to maturation of ARM loans to happen over next few years, short sales are one of a few available methods of preventing foreclosures.

MAY

2008

This is some really great information! I'm glad I found this website. So many good stories, and my heart goes out to all of you with these tough decisions to make.

Here's my story: Married mom of 3, we are facing our second substantial short sale in the past 2 years. We moved from KC under financial strain, to TN to be with family in summer 2006. We sold our KC home after 7 months on the market for a loss of $27,000. The TN home took some of the brunt of that debt with a large 2nd, plus CC debt for all the float. After a tough year in TN and many needed upgrades to that house, my husband got a gov't job offer back in KS, so we moved again and bought another house. We are upside down on the TN house by about $15,000 (2nd mortgage). We are entering our 10th month on the market, and 2 contracts have fallen through because of the inspection, both which had issue with the following: There is a mold/wood rot problem from years ago under the house that we were unaware of, and the electrical and H&A need to be upgraded. We had worked on and replaced the outside drains while we lived there, but the damage was already done. Estimates to repair the crawl space (obviously necessary) are anywhere from $5-10K, depending on a structural engineer's evaluation (pending), and the other upgrades would cost about $10K.

We both have great jobs now, but not enough to keep going much longer with the 4 mortgages and CC debt. We have about $10,000 equity in our current home. Our payments have always been current and our credit scores are both in the upper 700's. I can get a loan for up to $30,000, which we can afford if the TN house is gone, but the question now is -- where do I put the money? Obviously the house needs to be fixed and I feel morally obligated to do so. But, what if it still doesn't sell? It's a small town & there's already buzz about the house's "problems" among local realtors. I think my next logical step is an attorney because I'm not sure that I can negotiate a workout plan.

While my main concern was always maintaining our good credit, it's now facing bankruptcy. I found a response on trulia.com to a question regarding credit in foreclosure vs. short sale, and it talks about the "universal revue" that credit card companies do every 30/60 days to evaluate your credit and adjust rates accordingly. If my CC's jump to 20% + rates, I can forget paying the payments, we simply won't be able to afford it. Does anyone know which card companies have vowed not to raise rates based on bad scores? I know a couple have publicly announced this, I think Citibank is one. If I can ensure the rates won't jump sky high on my balances I might have a shot.

Thanks for reading. Angela

Angela, Thank you very much for your comments and especially for sharing your story with us. You are facing very difficult decisions. You definitely need a professional advice. Talk to a real estate layer, CPA and a lawyer specializing in bankruptcies. You will get probably some contradictory (or at least - it might seem so) advice. So, before you talk to anyone, you and your husband should prepare several scenarios and try to come up by uorself with pros and cons of each of them. Then talk to differnt experts and try to have them to fill up the voids in your analysis and have them to prepare the alternative pros and cons for a solution they fill comfortable with. At the end two of you should come up with a new analysis and implement the one that gives you a solution meeting most of your goals. You might be surprised to see a new solution/option emerging from your analysis. Both of you have good cariers and income, so there are many good years ahead of you.

JUN

2008

I believe I face a situation many are facing now:

I am upside down big time on three properties I own and have neg ams for all three.

House 1 (rented out): I was able to do a loan modification with one property that adjusted (whew!) after I blew my entire 401k.

House 2 (rented out): Have not adjusted just yet, but will adjust in about 6.

House 3 (primary resident): Have not adjusted, but will adjust in about 6 months.

I will be screwed when the other two homes adjust. My credit score is currently close to 800. I am trying to anticipate what is going to happen to me in the very near future and take action now. I foresee losing all 3 homes. Since I can't get out of the other 2 loans and the homes are not selling, I'm trying to secure a new home (that's much cheaper now) before my credit is ruined and of course get out of this type of neg am loan (a self-destruct loan product) and ultimately shortsale all three homes. Am I doing the right thing? Or should I buy a new house and just walk away from the other 3 and foreclose? Trying to live simply now and stress free. Although I am one that values my credit score, not sure what will have worse consequences.

Lisa

Thank you for sharing your situation. While I am definitely not in a position to tell you what is better, as you the only one who can do it. Let me ask you a few questions. Do you have any equity in any of the houses? If yes, how much? What are the current market values comparing with amounts you owe? You might be able to negotiate the loan chane on your residence. It is much more difficult to do on you investment properties. Another question is, do you have enough income to qualift for a loan owning 3 properties. This might be difficult as lender guidelines are much tighter these days. Another thing you need to doublecheck is the tax impact of short sales on your investment propertie (you OK with your residence). So, collect more data and get more advice before you make you final decision on how to deal with this situation.

I have no equity in any of the homes. I am backwards at this point on all three. The properties are located in a declining market in California. I believe my only saving grace is that I had an equity line in one of my properties of $105,000 (that wasn't yanked -- thank goodness) and I was able to take it out which I plan to use to purchase my new home. This seems to me the only way to get out of these neg am loans that I somehow managed to get myself into with the other 3 homes. I still am not clear as to whether to shortsale all the properties or to foreclose. Will the impact be equal on my credit? Will I be held responsible if I just walked away from these properties -- that is once I get into my new home? Or should I avoid foreclosure at all cost?

JUN

2008

Lisa, is your equity line on you residence or one of your investment properties? Is it from the same lender as a mortgage? The impact of foreclosure on your credit score will be definitely much longer lasting that this of short sale. However, your lenders do not have to agree for short sales. They will asses your "hardship" and let you know. You definitely need to talk to talk to a good CPA to find out a potential financial impact of whatever decision you are going to make. Also, talk to a good real estate lawyer. Only then, once the CPA and lawyer give you their advice, you will be in a position to make right decision. definitely do not rush. You a have a few months to think it through.

Lisa,

One thing that is starting to become common in California and Nevada, is that when you use a 2nd mortgage/ Home Equity Line that was established as a "cash-out" 2nd lien, and was not used in the initial purchase of the home that it is secured against, lenders are starting to sue homeowners that use these types of liens to extract the equity out of their home and then let the house go into foreclosure or try to do a short sale.

If you're considering using the equity line as the means to fund the downpayment on your next home, you will most likely find yourself in court defending against a deficiency judgment, and possible wage garnishment. In this climate, I don't think that you would have a valid defense if it is clear that you stripped the equity from one house only to buy another.

Checking with a CPA is always good advice, but in light of what you're considering, you should be checking with an attorney to see if you'll end up on the losing side of a court case with your lender.

David, thank you very much for your comment. Lisa, David gave you the critical part of your equation.

Situations like Lisa's are becoming commonplace in many markets, especially California, Florida and Nevada.

She's been paralyzed by the combined effects of a declining housing market, and her choice of loan products.

As shortsales and foreclosures are both on the increase, lenders are looking for every possible way to reduce their losses.

Homeowners facing the inability to qualify for a new mortgage, inability to meet payments on an adjustable rate mortgage, or other difficulties that have caused them to actually go into foreclosure need to realize that if the lender is paying the price by way of losing thousands of dollars in lost principal and interest they too need to be willing to pay a price. For many, that price is in the form of damaged credit, and even having to take equity from a home or even other financial assets like retirement accounts to be able to get out a home with negative equity, or a mortgage that they cannot afford.

Like most people reading this thread, I am an advocate of educated consumers, and fair and ethical practices in all aspects of real estate.

I do not however, feel that homeowners in difficult situations that were at least partially a consequence of their own actions should be let off the hook and allowed to buy another home the next day after a shortsale ore foreclosure. I do not see how that would possibly help to correct the economic problems that we are seeing in the housing market. For someone who was fraudulently put into a loan product that they were not educated on, or for someone who is facing foreclosure because of medical bills, obviously, they are not in the same classification as investors looking for profits.

Anyone going through foreclosure or shortsale has an obligation to learn from the experience and take precautions to insure that it does not happen to them again.

Of course, I'm mostly referring to investors and people who chose extreme leverage to try to gain wealth through real estate. Having multiple houses on option ARM loans is pretty common in some markets. I'm not blaming the loan or the consumer, but simply pointing out that investments that seem to have the biggest upside also seem to have the biggest downside. There is risk in real estate. There is also an obligation on the part of the loan originators who make the loans to provide borrowers with full disclosure about their loan products, as well as making sure that the loans match the borrowers needs in the long term, not just the short term.

David , thank you very much for your interesting comments. Yo are right that situations like Lisa's are becoming a common place. I need, however to come in Lisa's defence. It is not that we don't have to take responsibility for our own action. However loan crisis or dot com crisis became a social phenomenons that impacted peole' behavior. Hype has tremendous impact on all of us. It is no different, in a sense, from the peer pressure. We di things, because everybody els is doing them. It is expected to be done. If we don't do it we will be considered loosers or even worse - we would think abut ouselves as loosers.

But let me put some argument about "us" - the public being sacked in to a situation that otherwise we would have enough smarts to stay away from. Check Inside the Liar's Loan. Here is the key point of this article:

In 2006, a man named Steven Krystofiak gave a statement in a Federal Reserve hearing on mortgage regulation, representing an organization called the Mortgage Brokers Association for Responsible Lending. The organization had compared a sample of 100 stated income mortgage applications to IRS records. More than 90 of the applications overstated the borrower's income at least a little. More strikingly, more than three out of five overstated it by at least 50 percent. This isn't a few people fibbing a little. This was the whole system breaking down. If you lie about your income as much as most borrowers did, you'll wind up with payments that take half or more of your paycheck, a setup for quick foreclosure. Did this concern the lenders who were writing these loans? It boggles the mind to think that they could have been unaware. And yet they continued to write loans under the same terms, racking up supersize loans—and charging customers a little bit more in interest for what amounted to the privilege of lying. How could they? If you've been following the mortgage story at all, you know the answer: They could take a few hundred or even several thousand of the loans, put them together into a "mortgage-backed security," sell them to investors, and, presto, they were no longer Countrywide's or Washington Mutual's or IndyMac's problem. The consequences are predictably depressing.

So, if Federal Reserve knew about as far as in 2006 (and I am sure it was quite clear to many people before that - you takj about about ENTRAPMENT. People like Lisa were entrapped. If we don't llow to sell marihuana, why did we allow thousands of people to destoy temselves? By the way by douing that lenders cut the branch they are sitting on. No one rally knows how far we are from the "bottom" of the current financial crisis at the present time. Shouldn't Feds put breaks on much sooner? I guess once we are in power we loose a common sense and greed does allow us to do what we would do otherwise. If we put a warning sign omn the top of El Captain warning people about falling, lightenings and you name it, how was Lisa supposed to know that economy might change? After all 100% loans wer a "proof" that real estate will never loose value. How otherwise, anyone with a commeon sense including Feds would ever allow to provide 100 % loans and negative ARM? So, like many others Lisa got caught in a situation far beyond her control and while she has to solve problems herself, she has my symphaty.

JUN

2008

Wow! This is a very interesting post and one that is of great importance as more and more short sales are happening. There are also those savy investers that claim to "buy" a person's home in default with their lender, when in actuality, they are holding the place until they find another buyer that will do the actual purchasing of that home and they end up with the difference left at the closing table. Watch out for these kinds of investers too because if the original lender of the home knew what had happened, that they could have sold their home for more, they will come after the title company and others.

Sawadii Krab Khu Thavisak. Thank you for your comments. You are very right. Again, lenders are creating an opportunity, as lenders will not consider a short sale without a purchase contract. So agents, to save the sale from foreclosure file a fake contract. The process is "free" for all at the moment. Trying to control the process integrity with the "hardship" letter is just unbelivably naive. It is difficult to believe that these are often the same "sophisticated" people who packaged a few hundred or even several thousand of the loans, put them together into a "mortgage-backed security," sell them to investors. Now they are create "short sale process that don't work, neither for them, nor for clients.

JUN

2008

Hi Artur, I read your reply. I thought I was pretty clear in my post that I was not placing blame on anyone in particular, so maybe I miscommunicated something, or you misinterpreted something.

Anyways,

Firstly, try spell check before posting, that last post was difficult to follow.

Definitely not blaming anyone for anything, just pointing out that there was risk in real estate.

I certainly feel bad for anyone in a tough situation. I've seen my own real estate investments lose some value this year, so I can identify with what a lot of people are going through.

Anyone who has 3 Option Arms on 3 houses should be educated on the upside and downside of the product.

She doesn't mention being put in fraudulent loans, or lying about her income in her post.

Yes their had definitely been some fraud in the industry over the past few years, but to automatically assume that her loans were given to her by an unscrupulous loan officer, is wrong.

The majority of loans are not fraudulent. Obviously you have done a fair amount of research regarding our market and the factors that contributed to the problems that we are seeing with the investment side of mortgages.

As far as saying that "everyone else was doing it" and the peer pressure of investing in real estate, I have to disagree. Come on, we're adults. We all learned at a very young age that "everyone else was doing it" is not an excuse. I seem to remember hearing "If everyone else was jumping off a bridge...." quite often as child.

I think the federal law changed regarding the whether or not the deficiency has to be reported as income.

David. You certainly didn't place the blame on the client. I just followed a thought that we get pushed some times, even as grown up adults, to a bahavior that is a result of social influence. Dot com and recent real estate "booms" certainly led to such behavior. You are entirely right that "everyone else was doing it is not an excuse". However wa are all humans (read imperfect) and make imperfect decisions, at least from time to time. Howwever, if we do - nothing will release us from personal responsibility, such as "cleaning up a mess" we got ouselves into.

I really appreciate your comments, David. Thank you. There are definitely more than one point of views, different way of seeing things and interpretting them. I look forward to more comments from you in the future.

Laura, do you mean The Mortgage Forgiveness Debt Relief Act of 2007 or something else?

JUN

2008

Just to clarify, I was indeed convinced by a loan officer to convert my existing loans into neg am loans and was persuaded that "this was the way to go." This was definitely a decision I regret, since I now find myself upside down on all 3 homes. As for this loan officer, he skipped town. Anyway, I will take your guys's advice and talk to an accountant. All I know is that in a few months, these loans are going to reset and I will be in trouble. I worked so hard to get my credit to where it is now (close to 800), but know that it will change soon. I'm just trying to figure out the best course to take while me credit is still high and I have $105k equity line to work with. And yes, David, I did learn my lesson and as I mentioned before, I just want to simplify my life and figure out the best course to take at this time.

Lisa, I am really sorry about your loan officer. Unfortunately, negative ARM loans created a great temptation for loan officers. By selling them with 3 year prepay penalty and at high cost, they could earn up to 4% of the loan value from the lender. Additionally, they could charge clients on the top of the 4%. I talked once to an account exec of a major bank and he boasted that his bank's best "loan correspondent" (someone who sells loans on behalf of lenders). sold over 1000 of negative amortization loans in one year and he received 2% rebate for each of them and charged clients additional 2 % (it was before 4% rebates were available!). The average loan was $400k, so please do the calculations. This particular loan correspondent did only negative ARM loans. Good luck in getting your life back on track and thank you once more for sharing your story.

JUN

2008

Details: I am doing a short-sale. I have no delinquencies. I owe about $245K between 2 loans, an 80/20 so there is no mortgage insurance on a home that is now appraising for $216K. I first got an offer from a buyer for $170K. The lender countered at $185K. They buyer went up to $180K. The lender said they went to the "insurance company" with the offer of $180K and the "insurance company" is saying they want $188K AND they want a promissary note from me for anywhere between $20K and $38K.

My question is, what insurance company? There is no mortgage insurance. And why are they asking for a note from me as well? Is this because I have no delinquencies? Is there really an insurance company or are they just using that as a ploy?

JUN

2008

I just got off the phone with our title specialist and she gave me the number to Radian Mortgage Insurance. I had an 80/20 and there was nothing on the docs about MI. I know there is such a thing as Lender Paid Mortgage Insurance, but doesn't that have to be disclosed to the borrower? Can someone close a loan without MI and the lender go out months/years later and pick up MI without the consent of the borrower? Right now it is this Radian company that is holding up the sale of my house.

Kyle,

Let me make sure that I understand. You paid $245k and had 100% financing. Your loans where 80/20 ($196 + $49k). Who are your lenders? Do you have a Listing Agent or are you talking to lenderd yourself. Do you negotiate with lenders yourself or through an agent? I understand that your first lender is the one who is negoytiating the sale price. Has second lender agreed to payoff? From what you are saying I understand that a second lender wants a note for $20 to $38 k. That's one way to do do it. Did they promise you to protectd your FICO score for doing it? Usually 2d lender's payoff is between $1 to $3 k.

Coming back to insurance, I am not sure if I understand. Is it your buyer's insurance? Who is doing his loan? What is his/her down payment. Please provide additional information.

Anyone else understands what is happenning here?

I did an 80/20 when I bought the house for $232K a few years back. My escrows were not set up properly in their system and they paid them for 3 years and "forgot" to add that to my monthly payment (I go into a little more detail above, but that really is neither here nor there at this point) so that adds about $14K onto that $232K plus a few thousand for my Pre-Payment Penalty which is set to expire in July. All this minus what little principal I have paid off.

Both loans are with the same lender-- NationPoint which is the same as First Franklin which I think is now part of Home Loan Services which is part of Merril Lynch.... I think I have that right.

None of the documents we signed at closing included Mortgage Insurance-- Borrower Paid or Lender Paid. I, nor the realtors, nor the title company working on my stuff have any idea what kind of insurer this is since there is no Mortgage Insurance on my loan-- at least there wasn't when I took out the loan.

We have a realtor through ReMax and they are the ones negotiating the deal. The buyer came in at $170K. NationPoint countered at $185K. The buyer countered at $180K. NationPoint said OK, but then they "took it to the insurance company (Radian) on the loans and they said $188K" and then NationPoint said the Insurance company wants $188K from the buyer plus they want me to take out a loan for $28K and pay that off. My realtor is telling me they are telling them "No way". And here we wait.

JUN

2008

Basically, Banks / Lenders buy insurance from specialized insurance companies in order to protect their porfolios and further insure against loss.

The fact that you had an 80% first mortgage or even if someone has an 8% first mortgage, is actually irrelavant to this type of insurance.

Genworth, RADIAN, GE, etc. are insurance companies that help lenders insure against loss.

Banks also use these companies to help determine which loans they can modify and which ones they will have to foreclose on.

I know that Genworth provides the insurance for Countrywide, but I'm not sure who else they insure.

Just think of this as "mortgage insurance / MI" that you don't pay for. And, no it's not traditional "lender paid mortgage insurance / LPMI". It's a totally separate insurance that is established to protect investors and lenders. It truly has nothing to do with you as an individual.

This type of insurance helps diversify the risk of the banks portfolios, and helps them to get higher rated investments, which in turn help them borrow funds at lower rates, as well as command premium prices for their investments in the secondary market.

This insurance helps the lender be more attractive to investors.

The insurance company is holding up your shortsale because they have the final right to sign off on the loss that your lender is going to allow. After all, the insurance company will be reimbursing the lender for part or possibly all of the loss.

This is very common for lenders to do, but typically the insurance companies were signing off faster on the shortsales. In light of the massive amounts of foreclosures and shortsales, they are probably understaffed and taking longer to sign off.

JUN

2008

David, Thank yoo very much for the clarification.

JUN

2008

I am now in talks with the MI company (Radian) and they are wanting a note for the difference-- the whole difference. How much do they pay my lender if I go this route? Do they pay my lender 100% of the loan amount or is it something like 80% or 95%? I ask because I want to know if I can make it worthwhile for my lender

A few things have changed since this post originated, but there's still alot of helpful information here. Thanks.

I checked Radian's programs (you can to by clicking on Radian) and they have insurance by either by lenders, or borrowers of by both lenders and borrowers - their SplitEdge product. I have not found anything payable by the Seller. Shouldn't they contact your buyer instead? Radian sales person should be able to explain it to you.

JUN

2008

Wow, I really am grateful for all the candid information here! Ok, my situation is like everyone elses. I think I will still try to find a CPA tomarrow, but let me ask anyways. I still have very good credit, nothing has been late yet. I have a 1st and 2nd mortgage with Wells Fargo, 1st is about 190,000 and 2nd is about 24,000. When I got the 2nd, my house was appraised for 260,000. I could see I was getting further in debt the last few years, but I didnt want to move my kids again, good schools, neighborhood...

Long story short, I am now about 40,000 in debt, and am getting an offer tomarrow for my house that is 'low' according to my realtor. I am asking 229,000, i owe 213,000 plus any costs at closing and the realtors 5% (about 11,000). I NEED to buy a home right away after I sell, otherwise I will never OWN another home. I am on disability and child support, so more than 1/2 my income comes from child support, and that will end in 5 years. To my understanding, mortgage loans will only accept child support as income up until about this amount of time.

Does anyone have any ideas on how I can get this house paid and cleared so I can get right into another house? Also, I have read, and agree, with the comments that if you go short sale, forclosure... that you need to learn before owning again, or you havent 'earned' the right to own again. But I truly am in a bind, due to the timing, that I will never own again if I dont figure something out quick. I cant BEAR the thought of being a burden on my children staying in their homes... I will buy a SMALL condo just so I will have somewhere I can live on my fixed income. I may inherit money one day from my father, or aunt, but I really would like to continue to own my own home.

I cant imagine anyway I can pay off what ever shortage is on this offer. I do not have any savings.

JUL

2008

Hi, I have a home in Virginia which I want to sell off as I am losing money on this property from the day I bought it. At this time the market rate for ths house is at least 100K lower than what I paid for it. I am trying to short sale this house and wanted to know what I need to know before I get into this process. I am hearing about the tax implications and paying off the some of the loan amount. I am really worried about the consequences after the short sale is done. Anyone who is gone through this process, please advise. My credit score is pretty good at this time and taking a hit of 50 points is fine but I can't do more than that.

Please advise

Firstly, a single blemish on your credit may very well decrease your FICO score by 80-100 points.

I've seen $25 collections drop scores by 80 points.

Secondly, anyone touting DPA's (Down Payment Assistance Programs) is rgenerally eferencing FHA loans. Sadly, it looks like the use of Down Payment Assistance Programs is about to come to a screaching hault, possibly as early as month's end. Congress is reviewing a bill to do away with it all together as borrowers using DPA's have a much higher likelihood to default on their loans. This would be a big blow to first time homebuyers, and to the real estate market in general.

Don't pay attention to anyone trying to sell you on a loan "you might be able to get after the shortsale".

Lending guidelines are changing almost daily, and they are becoming more and more restrictive.

We're even seeing the GSE's like FNMA and FHLMC go on record as saying that they will make it even tougher for homeowners that walked away from their mortgage obligations simply because their home lost value, and not because they were unable to pay the mortgage.

I tell anyone in a situation like yours the same thing. You need to do what makes sense for you and your family right now. This is not a decision that you can make based on what may or may not happen to your credit score, or your ability to qualify for another home loan in the near future. Seek out help that may be avalable (which is obviously what you're doing if you're posting here), try to work through a solution with your lender (stay in contact with them all the way to the end).

Regarding the tax implications, there will not be any. For the time being, it is my understanding that the amount forgiven on a short sale will not be taxed as income on primary residences.

Lenders are not inclined to negotiate with people if the only hardship they are facing is that their credit score will drop if they walk away from their mortgage. A home decreasing in value is not a hardship, it's a non-performing investment. Loss of a job, medical problems, death of a spouse or loved one, increase in interest rate and inability to refinance, etc. these are harships that lenders are seeing daily and are going to great lengths to work with borrowers.

JUL

2008

Alpharetta, thank you for posting your question. Hope you find David's reply informative.

David, thank you very much for your excellent comments.

Vendors, please do not advertise your services and post your logos on this post.

JUL

2008

I lost my job in January and want to avoid going through the trouble of a short sale, deed in lieu. My husband and I want to go straight to a foreclosure to allow us more time to save our mortgage payments for 10-12 months. This is our way of getting $20k of equity out of this house before we leave. We owe $250k and the homes in my sub are selling for $210k...when they do sell. What are the credit implications of this considering his credit score is in the 500s already? I filed bankrupty in 2005 so my name isn't on the mortgage anymore because I didn't re-affirm it.

So I should be free of the foreclosure ramifications correct?

How many years will the foreclosure stay on his credit report?

Thank You,
Lost in Michigan

Michigan is one of the hardest hit markets because of the tough times facing the auto makers.

You should really take some time to study up on the new Housing Bill. It doesn't take effect until October, but if you can hold on, and keep in contact with your lender, this new bill may help you out. It's supposed to allow lenders to forgive your loan balance down to 90% of your home's current value.

Here's a great link to a summary article I read on CNN Money.

http://money.cnn.com/2008/07/29/pf/saving/toptips/index.htm

450 is the minimum credit score, so if you're in the 500's there really is not much more that can happen.

In your case I would say just put the credit score out of your mind and focus on what's available in the here and now.

I am working with someone right now here locally who was able to get 2 separate 6 month forbearances on their mortgage, and is doing the same thing as you, saving up their money rather than making payments.

If you want to keep your house, the new Bill may help you, but as you will see when you read up on it, it's set to make sure you stay in your house for the next few years because of the way the new loans are structured.

Good luck in your search.

I checked out the article and I don't think we qualify for any assistance under this new bill because according to the first bullet of the qualifications, (see below) the loan had to be issued between January 2005 and June 2007, and we've been in our home since 2003. In addition we already have a low fixed rate, 5.375% but we overreached and feel stupid paying the mortgage amount when the home isn't valued accordingly. We'd prefer to move into a rental townhome with the same square footage for $700/month less per month. We need to save for college as we have 3 kids starting college in the next 3-6 years. So we figured we'd save up our mortgage payments for 10-12 months and then continue to save $700/month when we move into the townhouse. Believe it or not, I have a real estate license and could list my own property, but again, I'd prefer to not go through the trouble because the mortgage companies are horrible in helping people with short sales, and also because we want to save up our mortgage payments.

If your original lender decides to do a workout, the new FHA-backed lender buys the old loan and takes over the reworked mortgage.

Check your qualifications

You must live in your home(s) and have loans that were issued between January 2005 and June 2007.
You must also be spending at least 31% of your gross monthly income on mortgage debt to be eligible for the program.
You must also prove that you won't be able to keep paying your existing mortgage. Plus, you have to be able to afford the new fixed loan.

By the way, thank you David for your response and assistance. I forgot to thank you in my previous message.

Sincerely,
Lost in Michigan

I'm happy to help, but I'm also Sorry to hear that the new bill may not be of much assistance.

There is a lot of fine print, and HUD still has not sent out a Mortgagee letter that tells us lenders what is really going on with this bill.

It is my opinion that the Bill is set up to Help the banks on Wall Street a lot more than the struggling homeowners on Main Street.

I have good friends who live in your market (Auburn Hills) and they are hurting as well. I hope things come to a swift resolution for anyone in similar circumstances.

I'm sure you're a smart and creative person. With enough research you may very well find a creative solution that minizes the impact going forward.

Also, a quick Thanks to ARTUR for keeping this thread in the first place. I feel like I've hijacked it sometimes, but in all honesty the subject matter is something that is near and dear to me, and there is way too much misinformation out there.

Good luck, and I hope you will share any good information that you find that is of help to you.

Thanks David and Artur for all of your help. In these times no one has money to pay an attorney a consultation fee. This is truly a God Send to have people like you willing to share your knowledge with the public. Have a great night.

Lost In Michigan

AUG

2008

Here is the official clarification on the tax liabilities from the shortsale of a primary residence.

** Note that 2nd homes and investment properties are not exempt

http://www.irs.gov/irs/article/0,,id=179073,00.htm

Mortgage Workouts, Now Tax-Free for Many Homeowners; Claim Relief on Newly-Revised IRS Form

Updated with FAQs at bottom - Feb. 28, 2008

IR-2008-17, Feb. 12, 2008

WASHINGTON - Homeowners whose mortgage debt was partly or entirely forgiven during 2007 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their 2007 federal income tax return, according to the Internal Revenue Service.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on this Web site.

"The new law contains important provisions for struggling homeowners," said Acting IRS Commissioner Linda Stiff. "We urge people with mortgage problems to take full advantage of the valuable tax relief available."

The late-December enactment means that reporting procedures for this law change were not incorporated into tax-preparation software or IRS forms. For that reason, people using tax software should check with their provider for updates that include the revised Form 982. Similarly, the IRS is now updating its systems and expects to begin accepting electronically-filed returns that include Form 982 by March 3. The paper Form 982 is now being accepted, but the IRS reminds affected taxpayers to consider filing electronically, which greatly reduces errors and speeds refunds.

The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on Form 982 (specifically, lines 1e, 2 and 10b).

The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.

Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home ( Box 7).

AUG

2008

I went through the short sale process in January and came to terms with CitiMortgage, my second mortgage holder. They were unbelievably busy and I felt fortunate to get through the process..... I became a nuisance to them because I finally had a contract on the house. I was beginning to worry that we wouldn't get it done and the buyer may walk. Finally, after providing the hardship letter stating that I had moved towns and subsequently lost my new job, they became easy to work with once I actually got to talk to someone.

Well, part of the terms were that I sign a promssory note that I would pay back the "short" amount on a 15 year term, no tax reporting, minimal reporting on credit, etc. As a result of my persistance and some very involved negotiations, they agreed to only make me pay half. Well, after recieving the actual promissory note with terms spelled out, they totally goofed and the terms weren't what we verbally discussed. I promptly called them panicked the day before closing wondering what had happened. The person at CitiMortgage helping me was so obviously busy that she wasn't surprised by the mistake and stated that they had failed to inform me of all of their policies. Within five minutes, she had cut my amount in half again!!!! I was concerned with the timing and getting the promissory changed and back to them. She told me to just change the form and sign it with a note about how the terms changed based on our conversation. I thought this was very odd how she could make a decision so quickly and informally.

Here's the kicker..... My payments were supposed to start in April of 2008. I have called and checked my account, the automated response says that the account is closed. I haven't recieved any correspondance from them, my credit report shows "closed", "legally paid in full for less than the full balance" and "election of remedy reported by subscriber". My score has always been between 750 and 800 and this has apparently dropped me to 717.

I'm not complaining, but I'm wondering if CitiMortgage wrote the entire amount off. I've been contemplating this for months and I'm afraid to push the issue.

Has anyone had this experience? What should I do? It would sure be nice to have this debt gone.

You defninitely lucked out with your credit score. Most short sales knock a score down by 80 - 150 points.

In my opinion, you never should have paid them anything outside of what you could have negotiated in the short sale of your home.

Second Lien Holders typically settle for 10 - 15% of the balance.

In the short sales that I've seen here in WA, the 2nd mortgages didn't get more than 10% of the balance. I've also seen a lot fo 2nd lien holders send over a promissory note in their final short sale package to the homeowner, they are just hoping that the homeowner will sign it unknowingly at closing, even though it has not been discussed with the the borrower/seller.

One of the most important parts of negotiating a short sale for a 2nd mortgage is making certain that you have in writing that they will consider the debt completely settled.

OCT

2008

Like "Wondering" we are trying to negotiate a short sale with CitiMortgage as our second. We have relocated with the military from San Diego to North Carolina, moving into a home we had purchased years earlier in a different move. The the value of our SD home took a big hit after we refinanced to pay school loans and such putting us severely upside down. The move has caused my wife to quit her job and it is much too difficult to try to keep the property and rent it out. We have an offer from a buyer and just want to be out from under the stress. We look to be short about $70K. We've always had good credit, always making our payments and don't like the idea of admitting we can't pay what we agreed to with respect to our mortgage. Our real estate agent has hired a short sale expert to help us but I'm still uneasy about how we will end up.

I'm interested to know how I might be able to reduce the impact on our credit and don't have a warm and fuzzy about the tax implications.

Appreciate any advice.

Hi Stressed,

Thank you for sharing your story with us. I am sorry about you difficulties. It looks as your agent is taking a good care of you. Hiring a short sale experts makes a lot of sense. I am assuming that you have already missed payments if your lenders are discussing short sale with your short sale expert. In such case there is not much that can be done about your credit score as it is going (probably already did) to drop. Lenders, every now and then, "roll back" no payment reports to credit companies if client agrees for repayment plan (the amount to be repayed can be negotiated). At the same time, if you complete short sale for your residence, the amount lenders "forgive" is not taxable at the present time (per Bush' law intruduced in Dec. 2007). So, the drop of the FICO score is the only major negative consequence of short sale (not counting the stress and frustration of course!). The good news is that your score should be back up (assuming that you pay tour other bills diligently) sooner that you know. Good luck with your short sale transaction.

OCT

2008

Thank you for the quick response. Actually, we aren't behind on payments, but we're very close since we are down to one income. We'll see what our expert can do.

I'm fine with repaying what we are short over time if my wife can find employment and we can manage it without much pain. But I'm trying to figure out what will be the least pain in the long run: 2 years lower credit but owing less, or saving our credit and repaying over several years.

Certainly appreciate your listening.

I am being transferred with my current employer and will be selling my home with relocation assistance. My issue is that I have a 2nd on my home and I will be unable to sell my house for enough to payoff my 2nd in full. I tried calling my mortgage company to ask if I can work out a repayment plan with them so that I will not mess up my credit and they told me I would need to do a short sale. I am current and have never been late. Do I have any other options other than a short sale? My fear is that my company will not assist with the home sale if I have to do a short sale. My company will guarantee me an offer in 90 days but it will not be enough to pay the 2nd off either. Help. The transfer is the best thing for my family.

OCT

2008

Hi Stressed,

You welcome. I wish your wife will find job soon. Good luck.

Hi Beezer,

It is very difficult to find someone to talk to you before you miss payments and then of course your credit is affected. I would right a letter directly to your lender's CEO and explain a situation to him (that you don't want to default on payments and work out the payment plan).

At the same time, I don't see the reason why your future employer relocation company would not assist you with a short sale. Of course it take longer, but they can hire "short sale facilitator" (it is a matter of discussion and agreement who pays for that) and that would not really effect them. If CEO does not respond, it might be your only option. You qualify for short sale as lender consider a job related relocation as hardship. Don't hesitate to contact me if you have more questions.

OCT

2008

Cimpler Real Estate,

Thanks for the quick response.

I was able to talk to the short sale department at the mortgage company and they asked me to call them with my Realtors name once my house is on the market and they would start the short sale process. This seemed a bit strange but I guess I will run with it and see what happens. Hopefully, my relocation company will not have an issue with this. My next issue will be trying to buy a house with a short sale over my head in my new location. If we can somehow come up with some money down will banks be more willing to give you a loan after a short sale? Should I try and buy another house in the new location before the short sale closes? What are my options? Wait a year to buy again?

OCT

2008

You welcome.

Whatever your decision going to be, short sale usually does not start unless client missed a few payments. This means that your credit might be effected. It means, even if you try to rent, not to buy, make sure that you can secure a rental agreement, before you credit is significantly damaged. So, here is what I would do: move, then rent or buy, and at last put the house on the market. Trying to sell when you had to move because of the job is defined as hardship. So, loss mitigation should accept it, even if you are not in default on payments and you should be able to protect your credit score as well.

OCT

2008

Hi, All this information is very helpful. I am recently divorced, upside down on my house. I am trying to save the house and get my ex off the loan. However, HSBC is only willing to give me 6 month hardship. I really do not see how things are going to improve in my financial situation or market by then. I went from two incomes to one and cannot to make the payment on my own. Why are they not willing to work with me, especially with the new H4H program? So, I feel like I just need out! Do I have to miss a payment in order to start a short sale? Can they come after other possessions such as cars, etc

OCT

2008

Hi Need Out,

I am really sorry about your situation. Unfortunately, lenders usually don't talk unless you are in default. The H4H program is known also as a Short Refi. You can receive a new loan for 90% of the market value, but you have to qualify for a loan from FHA approved lender. This might be prove to be very difficult, as your ratio of debt to income is most likely too high. Loan modification, either directly with lender, or through a competent negotiator, might be a way to go. The drawback of loan modification method is that you need to default on payments before lenders will talk to you.

OCT

2008

It's been wonderful and at the same time sad to have read this entire blog. Thank you to all that have contributed positive responses!

Here's our situation.....

My wife and I purchased our first home (townhouse) for 132K. It's part of a condominium association, so we pay $300 in maintenance fees, PLUS $100 more on a special assessment for 3 years (total $400/mo). Since my wife has not been working because she takes care of our children at home, it has come to the point where I can no longer afford all the bills on my own salary. Her grandmother recently was diagnosed with terminal cancer and to top it off, the community association where we live is above the 40% margin in foreclosure! The board of directors is about to propose a budget for next year where the maintenance fees will increase above the $300 mark because of speculative buyers that are not paying their association dues! We've had enough with the situation in this condo--- the property values have plummeted so low that recently there was an auction on one of the units for 50K!!! More than half the units are being rented out so there is no incentive from the actual owners to do anything about this condominium because they don't live here, they just collect rent from their tenants and on top of that, the same ones that are leasing their units are not paying their association fees!

My wife and I have decided that we are going to stop making payments and eventually go into a short sale. She is the only one on the lender's note, which means that my credit will not be affected, and since mine is perfect, we figure we can afford to damage her credit to get out of this dump that has no future (even in 5 years i don't see any improvement).

My concerns/questions to you guys are: When it comes to writing a hardship letter, is it enough to say that the cost of the maintenance fees is or will be so high that I can not afford it? Besides all the examples you've listed on this forum, what exactly constitutes a "hardship"? I mean, does the lender actually go and confirm whatever "hardship" is on the letter? Or do they just accept it just because it is on writing? Also, my realtor tells me that because the value of the house is so low versus how much we owe that it practically makes the sale of the home prohibitive. How true is that statement? How long does the lender take to actually foreclose if we are unable to lure a buyer? Which, we believe will happen regardless (foreclosure)..... after all, no one is buying anything in this community except for the 50K auction!

Like I said, we don't care about her credit, we just want out of this dump because I can't afford to pay it anymore. Even if I could pay it, why would I stay here? I think that is what that 40% of foreclosure units have realized so far, that it doesn't matter if they don't pay their fees nor their mortgage because this place is looking like a slum more and more every day. Please help me and give tips and/or advice on what the "real" consequences are beyond FICO score, which is irrelevant to us. Thank you so much.

NOV

2008

Hi,

Sorry that it took me longer to get back to you with the "longer" reply. Let me start with a question. Would you stay in the house if your loan was modified, both the principal and rate lowered? Lenders have become quite responsive to modify loans. It can happen either by so called Short REFI (you would obtain a new loan from another lender for 90% of the current market value and the difference between you old and new loan is then "forgotten", i.e. absorbed by a current lender and his investor as a lose), or by modification of your existing loan by your current lender. In either situation you would end up with a lower principal and rate that reflect your ability to pay. To qualify you need to experience hardship or the hardship is anticipated as a result of rate reet that has not yet happened. If you don't want to stay in the house - then short sale is a solution. In either case you have to document hardship and obviously lenders do expect truthfulness. You do not have to fall behind with your payments to qualify for loan modification. If you provide me with more specifics as I requested in my previous reply (What type of loan do you have? Have your monthly payments increased? When did your wife stop working? Are you contributing to medical bills (nurse, etc.) of your wife's grandmother?), I will be able to give you more accurate reply. Regarding tour agent, the current value will not impact lender's decision to approve your short sale, however their perception of your hardship will. Regarding the impact on FICO score, loan modification gives you an opportunity to protect your FICO score (as I said - you don't have to fall behind with payments to qualify). Feel free to ask me more questions. Hope it helps.

NOV

2008

Greetings,

Would a short sale of an investment property purchased under a LLC effect the group's credit? We (3 couples) purchased a condo conversion that now has a market value that is 80K less than when we purchased it two years ago. The morgage payments are current, but we are suffering a huge deficit, because we had to result to renting the property for far less than the monthly expenses. We just want out of it, but do not want to com

Please Respond

Most likely, unless your underlying loan was a commercial loan based strictly on business credit, then the short sale will affect you. I'm thinking that all 3 coupples probably showed credit, income and asset information to obtain the loan? Is that correct?

Perhaps the easiest way to tell is simply to pull your own credit and see if the loan is currently reported there. If so, then it is likely to expect that the short sale will report as well.

Since it was a purchase loan, and since the title was held in an LLC, you mostl likely should not have to worry about any additional recourse after the short sale is completed.

Realistically, all a short sale does is put you out of being able to get a conventional or FHA mortgage for a couple years. Plenty of other ways to get financing for real estate right now. I would just look at this is a learning experience that will help you to find more creative ways to finance.

NOV

2008

Here's the scenario: my wife and I own a home in the San Diego area that appraised at $720,000 in 2006. The first mortgage is for $464,000 and the second is for approximately $50,000. Almost all of the proceeds from the second were reinvested back into the property. My wife is the only person indebted under the two loans.

Our employment prospects were looking bleak in the immediate area, so we placed the property on the market and found employment out of state. Despite reducing the price substantially, the house sat vacant on the market for an entire year without a single offer. The house is of excellent quality on 2.2 acres, but it sits on a very steep hill adjacent to a very busy highway which has probably deterred many people from wanting to buy. Subsequently, we leased the house on a lease option in November 2007 to a young couple who could not qualify to purchase a home on their own at the time. The couple - she is self employed with a bankruptcy in 2004 from an earlier marriage, and he is well-employed and also finishing school - made all of their payments in a timely manner through May of this year when she lost several of her accounting clients. They notified us that they would have to vacate the property because they could no longer afford to make the lease payments. We were still out of state and not in a position to argue, so we renegotiated the lease payments to something that they could afford under their new circumstances. They have made all of their payments since in a timely manner. They are also paying the property insurance as a condition of the lease.

However, the amount that we are receiving in rent only covers the "minimum" payment due under our adjustable mortgage so, although we are current on everything, we are going further in debt at the rate of $500 per month because we can only afford the minimum payment. Moreover, my wife and I have recently BOTH been laid off from our jobs. We can continue to make the minimum payments and stay current on both the first and second mortgages, but clearly there will be a point of no return. We would estimate the property has declined in value to approximately $520,000 in the meantime.

The couple living in the house would still like to purchase it, and we would like to let them assume the existing mortgages and forfeit any equity just to get out from under the loans. However, when we contacted the lender (IndyMac), they would not consider letting the couple assume the loans unless the couple qualified for a "new" loan and came up with a $48,000 down payment. I have tried to reason with Indymac that (1) they would be gaining TWO people on the loan as opposed to just one now (remember, my wife is the only one on the loans) and (2) the loan amounts would not be reduced as they would be in a forclosure or a short sale. The couple has good credit (she has rebuilt her credit in the past four years and his credit score is in the high 600's). What is ironic is that IndyMac approved my wife for the original mortgage even though she had a bankruptcy on her record from 2003 yet this couple - her with a bankruptcy and him with a clean credit history - is not acceptable. In the meantime, the young lady has re-established her client base (she is an accountant) and taken on a separate part-time job, so they will be increasing their rent payments to us as of the first of the year.

The representative from IndyMac is very personable and claims to be in a similar situation himself where he owns a property in Florida that has been leased to a couple for the past three years on a lease option, but the lender will not allow them to assume his loans either without qualifying. Apparently it doesn't seem to matter whether the renters have a good payment history or not. In other words, even though they can afford the monthly rent payments, they can't afford to make the loan payments. Doesn't make sense to me.

Anyway, IndyMac is now suggesting possible short sale. However, would we be better off asking for a loan modification to reduce the monthly payments and move back into the house ourselves (since we are both now unemployed and flexible)? Also, what is the latest on forgiveness of the short sale deficit? Is it taxable or is it truly "forgiven?" Thanks for any suggestions or advice.

NOV

2008

I'm negotiating 2 short sales with IndyMac right now. One has been very easy, as the clients got deported and are not on this continent, let alone in the house.

The other one I'm working on has not been easy. It's a negative equity loan, which they seem to want to keep on the books until they can dump it into their 2009 losses, I guess.

You're asking a question about the tenants "assuming" your current mortgage. Depending on the type of loan and how it was broken down as an investment in the secondary market, they most likely can't make assumable, especially since it requires a massive principal reduction just to make it fall within the 95% LTV guidelines right now.

If you own other property, which it sounds like you may, don't expect any help under the so called government bailout. There are basically 2 categories of loan modification, the actual modification of your existing loan, and then there is "principal reduction" which is usually part of the Hope For Homeowner's initiative which is a conduit for banks to dump people into FHA guaranteed loans, some actually at higher rates, but with reduced principal equivalent to 90% of the current value of the home. If you own more than 1 home, you don't qualify for the FHA bail out.

Modification may be an option, although IndyMac will still have what is considered a "non-performing" loan on it's books, as they would have to make a new loan for you which does not meet the credit standards of FNMA and FHLMC, so they really have no way to sell the loan as an investment. Also, the loan would most likely be at a rate far below market rates, and has no value in the secondary market, which after all is where lenders make their profits on loans.

As for your renters qualifying, you're running into the newly introduced guideline that doesnt allow for bankruptcies that are less than 7 years old. Previously they were going off of 4 years for financial mismanagement and 2 years for medical bankruptcies. FHA used to make exceptions on bankruptcies all the time, but I've not seen one be given since last summer.

Also, the IRS ruling still stands, shortsale forgiveness does not count as taxable income in "most cases", whatever that means.

Here is the IRS Link.

http://www.irs.gov/irs/article/0,,id=179073,00.html

NOV

2008

After attending recent informational meeting about Short Sales, It really depends on the persons situation in some cases foreclosure is their best option; I say do a deed in leu of if necessary... With Short sales you need very patient buyers who are willing to rewrite the offer several times as the dates come and go without the bank approval....

Foreclosure is not the best option if the sellers can get a shortsale. Even "friendly foreclosure" is not the best option.

We're a talking about a significant difference in the affect on their credit, and also the amount of time before they will qualify for a new mortgage.

I've done plenty of short sales this year in 5-6 weeks. I've worked with investors that have bought short sales and resold them within the initial 6 weeks. I'm sure at least 2 of the 5 I'm working on right now will go that way.

The problem is that too many people out there don't have the patience or have any contacts with the lenders. The lenders in the mean time are understaffed and have tried to outsource a lot of their loss mitigation. I also see a lot of people not submitting the complete short sale information that the lender requests. People may assume that because they have no money in their account that they don't really need to submit their bank statements, or similar types of situations. This prolongs the process.

I outsource to a service that only negotiates short sales, they do dozens of them every month, and they were doing short sales exclusively before the market ever took the downturn that we're in now.

The process can definitely take time if you're not familiar with it, or if you're not in a position where you can drop everything to just focus on the negotiation when the lender calls. Typically, the biggest complaint I see from sellers is that once the lender demands something, the seller doesn't have enough time to submit it.

Anyone can negotiate a short sale. I work with a real estate agent on most of mine, but I've done some without agents.

Also a lot depends on who your lender is.

For instance, if you're lender is GMAC, IndyMac or Litton, you can crank it through in 6 - 8 weeks.

If your lender is Wells Fargo or CitiBank, you may be looking at 3 - 6 months.

Also, the offers being submitted need to be realistic. If you're writing an offer at 65% of FMV, and the house is in good condition, forget it, it's not going to happen.

These idiots on late night TV talking about 50 cents on the dollar live in markets where nobody wants to live.

If you're in CA, or even here in WA, you're probably going to be paying at least 75%, and even up to 85% of FMV in a lot of areas. For a quick short sale, write an offer at 80% of FMV, you should at least get a quick response from the lender or loss mitigation company.

DEC

2008

My scenario:

My wife an I are getting a divorce. She will be filing Chapter 7 within the next couple weeks. As a result the, credtors will turn to me and I will be under pressure to file chapter 13, as I have too much income to qualify for Chapter 7. I would like to keep the house, but will not make enough money to pay for everything (mortgage, 2nd, all of the marital debts, credit cards, Student loan and child support). I'm considering trying to sell the house to pay off the 1st and 2nd, but market value is just below what I owe.

1st - $222K / 2nd - $44K

So I owe $266K and the home could possibly sell for around $245-$250.

Is it worth the stress and pain of doing a Short Sale if I am going to have to file Chapter 13 anyway? If I've been advised to stopo paying on everything, should I just let the house go and save my money? If I do agree to a Short Sale with the lender, they will get every penny I owe them - the holder of my second won't though... So would it still be considered a short sale if I pay off the 1st but not the 2nd and then throw the 2nd into the bankruptcy? I doubt that's an option.

I am really trying to get a grasp on all of my options so I can make the most informed decision. Any help or advice is appreciated!

FEB

2009

We purchased a $600,000 home in 2006 on a 80/20 no interest loan and it has gone down in value about $125,000 according to our realtor's estimates. My husband is currently in an excellent contract job ending in May. He's been interviewing, but no propects yet. I am working now and have an opportunity to transfer to another office in a much cheaper market or stay here with my current job (which would not cover our monthly expenses without his salary). We'd love to move to the cheaper area. Renting out our house would only cover about half of our expenses.

We've pretty much accepted we're going to have to do a short sale - there's no way we have $125,000. We haven't missed any payments. Will his job ending and my transfer be enough for a hardship? We've tried negotiating with our bank (BoA) for the past 6 months for a modification and they won't talk to us since we're both currently working. I really want to avoid the credit hit if possible, but I see no other reasonable options. Should we stop paying now or move first so we can get an apartment there without problems?

Any suggestions are appreciated!

FEB

2009

I have been diagnosed with recurrent ovarian cancer, not one with a good cure rate. I'm currently on short term disability with my company and going through 10 months of treatments. I have complicated my life with investment properties that are under water. I am looking to simplify and recover from treatments by moving in with my daughter and hoping to clear my life of these financial burdens. My financial status...

Property #1: Primary residence in California: about $40k equity, looking to sell and use the money to finish an apartment in my daughter's basement for my living accommodations.

Property #2: Investment property in California: loan balance $202k, worth $175k. Rental income is paying payments but not taxes and insurance.

Property #3: Investment property in Utah: loan balance $298k, worth $250, payment $2260/month, renting for $1600, and I'm currently paying the additional $660/month. Because of the portion of the payment that I'm paying, I'm wondering about a short sell for this property or does a restructure make sense?

I have no savings due to these properties and having to make payments when not occupied or fully covered by the rental amount, but have some 401k savings. Much of my current income is going for medical bills and travel to be with family during my treatment recovery. After my short term disability expires at the end of the year, I'll switch to long term disability, reducing my income by less than half and I will also need to deal with insurance or non-insurance issues. I simply won't be able to continue as I am today with the investment properties.

I've never defaulted on any loan or committment in my life. I don't want to hurt my credit rating I suppose because of my sense of integrity as many others on this site. I probably won't buy anything again on credit except maybe a car. Should I care about my credit? Should I try to pay the balance after the short sell? I'm looking for advice and options that might make sense in my situation.

Any suggestions, comments and advice will be greatly appreciated.

MAR

2009

Thanks for all the information. This is really useful.

My situation is: Living in Massachussetts, I was laid off in November 2007. I found a great job in Denver Colorado and moved my family there in April 2008, where we are renting. We tried to sell the house prior to leaving but could not, so after 6 months, we got renters who pay about 1/2 the mortgage. The single mortgage is for $540K. If it were appraised today it might come in at $475K, but I don't know for sure.

I cannot buy in Denver because I cant save enough for the down payment. I'm just able to cover my expenses on that house, rent and the additional debt incurred preparing the house and then carrying it and this rental in the overlapping months. I'd like to be free of the house. If it sold at $475K I couldn't pay the $65K +$24K + closing costs required at the close. If my tenants leave or my wife loses her job there would be no way for me to continue to make payments on the house. So I am considering a short sale.

I have not missed any payments on the house or any credit card debt, and my FICO is near 800. I'm not currently not afraid of the credit hit -- though I have heard, and am looking for confirmation -- that it could cause my existing credit card debt interest rates to be increased by the banks/credit card companies. Is that true? If that's the case, it could hurt more than I'm aware of. I don't need to buy a house yet, and could recover my credit over the 2-3 years (this I have heard from several places -- though this blog says it takes 2 years).

I am wondering if I would be forgiven the debt, and not be taxed by the IRS as income because at this time it is not a primary residence -- However, I don't own another house, and had to move for the new job.

Can you provide some insights on this?

Thanks,

One additional thing, the mortgage was an interest only, which becomes P+I in 2010 and my payments will increase by $600/mo.

I'd really like to move on with my life in Denver. Do you see any other alternatives to a short sale?

JUN

2009

Hi,

We have just added your latest post “Credit consequences of the Short Sale" to our <a href="http://www.creditca-rd.info"> Directory of Credit Cards</a>. You can check the inclusion of the post <a href="http://www.creditca-rd.info/story.php?title=credit-consequences-of-the-short-sale"> here </a> . We are delighted to invite you to submit all your future posts to the <a href="http://www.creditca-rd.info"> directory </a> for getting a huge base of visitors to your website and gaining a valuable backlink to your site.

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http://www.creditca-rd.info

OCT

2009

I currently own a home in a suburb outside of Atlanta, Ga. 3 and 1/2 years ago I relocated to Portland Oregon with my company. We purchased a home in Portland upon arrival, thinking that we'd be able to sell the Ga house fairly quickly, at least all evidence pointed that way. Teh short of the following 3 years is that my wife and I had our first child, her position was terminated while on maternity leave, we're down to 1 income, and apromise of no raises or bonuses for 2009-2010. I've persued a loan modification with the Portland home but was denied, with the lender Wells Fargo actually suggesting in writing that we persue a short sale. We now have offers for short sale on both homes. My short sale expert in Ga tells me that we should be concerned about the Mortgage Insurer requiring a promissory note to carry a portion of the remaining balance. My West Coast short sale "expert" says he hasn't heard of anything like that before in over 200 short sales.

The short sales are both set to close by the end of November. We opted to go this route to minimize the effect on our credit, but it looks like now we may still be left holding the bag. I have gotten advice to sign the prommisory note, and then basically not pay until it goes to collection, settling on a fraction of the original ammount, but that seems shady and like it could worsen our credit.

Can anyone out there help me fill in the gaps?

FEB

2010

About a year ago i co-signed with a friend so he could purchase a condo, unforeseen problems and he has not made a payment in 6months, and has decided to short sale. i have no debts and my credit score was in the 800's. How bad is this for me, and how can i get out of having my credit ruined any further, and will the lenders forgive on my part?

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Artur Urbanski

Burlingame, CA

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Cimpler Real Estate, Inc.

Address: 533 Airport Blvd., 4th Fl., Burlingame, CA, 94010

Office Phone: (650) 401-2245

Cell Phone: (415) 672-5051

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