By Maggie Clemens | Guest Columnist
There are currently sixteen million homeowners who owe more on their mortgage than their homes are worth, the slang term for that is “underwater.”
There are several ways that an “underwater” situation can be dealt with; one way is a very familiar term these days, but what exactly is it? A “short sale” is a real estate transaction in which the proceeds of the sale do not cover the balance owed on a loan or loans on the property.
Lenders, quite simply, accept a discounted payoff on the loan and allow the sale of the property to close. This allows the homeowner to sell the property for less than the outstanding balance of the loan and turn over any proceeds to the lender, most often in full satisfaction of the debt.
The term “short sale” is actually misleading, because the process itself is not short, and can be rather lengthy depending on the circumstances involved. However, banks would rather do a short sale than risk losing more money in a foreclosure, so the process is much quicker than in the past.
The decision to do a short sale is not always an easy one. Most people buying a home generally have every intention of fulfilling their obligation to the bank, but sometimes it is the best decision.
So what does life after a short sale look like? It does affect your credit, but not as much as most people think. When the bank accepts a short sale, that account will show “Settled for less than the full amount.” And this will cause your credit score to go down. But as I mentioned earlier, over 16 million people are in this same situation, so collectively a short sale in and of itself is not that big of a deal. What is a big deal is the rest of your credit.
Unfortunately, I run into clients who have destroyed their credit, taking from Peter to pay Paul, in an effort to keep a house that in some situations will take many, many years to break even. In my opinion, if you can keep the rest of your bills up to date and the only thing that is delinquent, or settled, is your mortgage account, you will see very little affect on your overall credit rating.
The big question is, when can you buy another house? Owning a home is the American Dream. With short sales, each situation is unique and depending upon the circumstances, some are able to go immediately back into home ownership. For others, it will take two to three years. The actual time really depends on your credit and down payment, just like it should have never gotten away from!
If you are considering a short sale you should consider doing it soon, and here is why. When the government realized how much the housing bubble bust was going to affect a huge amount of people, they enacted several bills to help protect us.
In California, Senate Bill 931 requires a first mortgage holder to accept an agreed-upon short sale as full payment for the outstanding balance of the loan, which means that once accepted, they cannot come back at a later time and ask for more.
Unfortunately, they didn’t realize how many people had second mortgages on their homes. This past year Senate Bill 458 extended the protections to junior liens, effectively providing that any lender that accepts a short sale agrees to accept this as full payment of the outstanding balance of all loans. These are bills are now law and they can only be changed by an act of Congress.
However, the Mortgage Debt Relief Act of 2007 is not a bill or a law. According to the IRS, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. But the Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude the discharge of a debt on their principal residence. Before this act, the amount that you were forgiven was taxed! President Obama extended this Act until December 31st of this year, but there has been no talk of extending it; however, we are in an election year and anything can happen. So if you or anyone you know is “underwater” and considering a short sale, act now!
If you have questions about short sales, foreclosures or any other aspect of today’s real estate market, ask me and I may write about it in this column.
Maggie Clemens served her customers with distinction for over 25 years in the local auto industry and for the last several years has been a licensed real estate agent with Keller Williams San Diego Metro. She can be reached at maggieclemens.com or at firstname.lastname@example.org.