Short Sale Snags – or as my partner and I call them, Learning Experiences, seem to grow each day. Many homeowners just want to throw up their hands and allow the bank to take their homes in foreclosure. The mounds of paperwork on top of the stress of losing a cherished home can be overwhelming for a lot of borrowers.
As a Certified Distressed Property Expert, CDPE, I am often asked to council those with homes in St. Augustine as to the benefits of a short sale over a foreclosure. Floirda homeowners need to be aware of the rules in our state and the differences between the two options. Florida law allows banks to issue a deficiency judgment and go after borrowers for up to 20 years after a foreclosure or short sale is completed. That can lead to a garnishment of wages long after the loss of the home.
This is HUGE – and the number one reason, in my opinion, that an owner should do everything he can to negotiate a short sale where the lender waives its right to seek that deficiency judgment.
In a short sale, the bank agrees to take a lesser amount for the home than what is owed on the mortgage. When negotiated successfully, the lenders sometimes are willing to write off the deficiency on the front end. In contrast, after a foreclosure a deficiency judgment is automatically awarded by the courts and the bank is free to seek a claim for up to 20 years.
Another consideration for Florida homeowners is the effect of a foreclosure or short sale on the owner’s credit. According to the Fair Isaac Corp., the creators of the FICO score, the negative effect of a foreclosure is only marginally worse than a short sale. But in Florida, that deficiency judgment from the foreclosure is likely to have a much larger impact on a credit score, one that will affect borrowers for many years to come.
Lastly, the difference between what was owed on the mortgage and the net proceeds of the short sale will be considered income by the IRS and taxed accordingly (unless an exception applies). Under the Mortgage Forgiveness Debt Relief Act (2007), taxpayers who were forgiven part of their mortgage on their primary residence can likely avoid tax liability by including Form 982 with their tax return. See IRS Form 982 instructions for full explanation of qualifying criteria.
Because state laws vary and each homeowner’s circumstances are different, it is important that homeowners in distress consult a professional for advice. If you own a home in St. Augustine and are facing the decision about a Short Sale or Foreclosure, please contact me. I’ll be happy to help you in any way that I can.
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