Real Estate Broker/Owner with REO PRO REALTY



If your home is under water (you owe more than what it's currently worth), and/or you are having problems making your mortgage payments, it's important you carefully consider all options available to you:

Loan Modification-  Banks are more flexible than ever to reduce mortgage payments by reducing the interest rate and at least some banks will reduce your principal in some cases.  In order to qualify, you must prove you have income above and beyond your monthly expenses.  Even in situations where the bank offers a Loan Modification and/or principal reduction, if the new payments are still well above the current fair market rents, a Short Sale could be the best solution.

While nobody can predict exactly what will happen, most experts believe real estate prices will stay stagnant for 5-7 years and consistent year-to-year appreciation may not resume for another 10-15 years.

  Foreclosure- This is likely the worst option because of the long term effects it can have on your credit, your employment opportunities, income taxes etc.

  Short Sale- This option is worth considering for the following reasons:


In most cases, once a homeowner decides a Short Sale in the best option, the sellers stop making mortgage payments.  In most cases the decision is made AFTER the seller is already behind not before.  The Short Sale process could take anywhere between 3-12 months or even longer in some isolated cases.  I had two that lasted more than a year because the lenders took that long to approve them.


With a Short Sale only late payments show up on the credit report.

Once Short Sale is closed, it is reported as "settled for less than full amount due".  As long as your credit is kept clean in the rest of the accounts, the impact to the FICO Credit score could be as little as 50 points.  A foreclosure could impact FICO scores by up to 200 points and stay on record for 7-10 years.


A person selling their home as a Short Sale can be eligible for a FNMA (Fannie Mae) loan after only 2 years.  I have heard of cases where Short Sales sellers can purchase another home immediately as long as they stay current on the mortgage payments on the house they sold as a Short Sale.  A foreclosure, on the other hand, can prevent the previous owner from getting a FNMA-backed loan for 7 years.


At this time, there are no questions related to Short Sales on the financing application.    On a foreclosure, there is a question related to foreclosure in Section V111 of the Standard 1003 Application.



In a Short Sale, it is possible to negotiate that the seller be released of the deficiency in writing by one or more lenders.  In many states, including California, lenders have the right to pursue a deficiency against the homeowner.  It is more likely that lenders will seek a deficiency from the sellers on a foreclosure than on a Short Sale.


It is likely that a Short Sale be closer to market value than a foreclosure (REO or Bank-Owned).  Therefore, the amount lost by the lenders will be less on a Short Sale than on a foreclosure.  In the rare event the lenders seek a deficiency judgment, the amount owed will be less on a Short Sale.


On a Short Sale, the lender sends the IRS a 1099-C for the amount "written off". As long as the home was the seller's primary residence and was not refinanced, the Mortgage Debt Relief Act of 2007 protects homeowners from owing additional income taxes.  In cases where the seller did not occupy the home and/or the home was refinanced and money was taken out, insolvency (Chapter 7, 11 or 13) could be considered.


A Short Sale is not a public record and is reported separately on a credit report.  Prospective employers will only be able to see the late payments and the account has been settled.  A foreclosure could pose a bigger obstacle to employment.


A Short Sale does not pose any problems for Security Clearances.  A foreclosure could be a problem when applying for police officer, military, CIA, FBI etc.


Disclaimer-  In matters with potential tax and legal implications, it is always recommended that professionals be consulted (CPAs, Tax Advisors, Attorneys).


Rudy Romo


T: (707) 235-4773

F: (707) 526-5790

Comments (1)

Residential Realty Partners
Residential Realty Partners, LLC. - Orlando, FL

Great blog. Lots of great information for customers and other agents.

Jan 25, 2010 02:08 AM