| Homeowners facing foreclosure in California have | | | | "black eye" on their credit that will stay that way for at |
| approximately 120 days from the Notice of Default | | | | least seven years. With that in mind both parties may |
| (about 4 months) in order to resolve their outstanding | | | | be willing to negotiate a short sale; however, the lender |
| mortgage debt. When a homeowner finds themselves | | | | ultimately has the last word on whether this is an |
| in this situation, the most proactive step a homeowner | | | | option they will allow. |
| can do is to act in a timely manner to get a realistic | | | | Another good reason that a short sale might be |
| look at what their options may be. There are many | | | | desirable is that the surrounding neighborhood and |
| choices that a homeowner can choose from in order | | | | community at large may benefit from homeowners |
| to best reduce the overall loss during the stressful | | | | opting for short sales instead of foreclosure, as these |
| financial situation they may find themselves in; | | | | types of sales are not as heavily discounted as |
| however, denial shouldn't be one of them. | | | | foreclosure auctions. These sales may help "mitigate |
| In the slew of options that are available, there is a | | | | drastic decreases in the values of nearby properties." |
| little-known transaction known as a "short sale" which | | | | For a homeowner considering this option, there will be |
| to some homeowners in foreclosure may seem like a | | | | a lot of details that will need to be addressed and |
| dream come true. Short sales occur when a lender | | | | negotiated with the lender. If your bank agrees to a |
| allows a homeowner in default to sell a house for less | | | | short sale, the homeowner then hires an agent to find |
| than the total value of the loan. In many cases, the | | | | a buyer for the house, sells the house at a loss, and |
| lender then forgives the remaining portion of the debt. | | | | with the bank's approval, they agree to take the loss |
| But before a homeowner who finds himself in | | | | incurred. To be sure, as trying as it may be under the |
| foreclosure gets too excited about what seems like | | | | circumstances, a homeowner should try to maintain |
| welcome debt relief... there is a catch. | | | | courteous and professional communications with their |
| So what's the catch? Lenders may claim whatever | | | | lender at all times. This open communication can |
| debt they've forgiven as a loss on their taxes and | | | | markedly improve the possibility of a timely, smoother |
| issue a 1099 form to the homeowner; in this case the | | | | transaction and adequate solution for all parties |
| seller, for the total amount. In other words, the forgiven | | | | involved. A homeowner will literally be racing against |
| debt is taxed as earned income and depending on the | | | | the clock and anything he or she can do to facilitate |
| loss and the homeowner's (and potential seller's) tax | | | | the process, will result in a much more positive |
| bracket it could mean a significant increase in their | | | | outcome than it might otherwise be. |
| taxes. A homeowner should definitely check with his | | | | In addition, the homeowner should be diligent to find a |
| accountant for this information. On the other hand, if a | | | | professional realtor who understands short sales well |
| property is sold under a short sale, the lender may | | | | and has the experience in working with lenders and |
| require the buyer to make up the difference, either | | | | banks before giving the potential realtor the listing and |
| through a personal obligation or a collection for the | | | | hiring him or her to sell his house. As paperwork |
| remaining balance often referred to as a deficiency | | | | intensive as a regular real estate transaction can be, |
| judgment. According to Barron's banking dictionary, the | | | | the paperwork and negotiation process will escalate |
| definition officially is... " A court order authorizing a | | | | during a short sale and lenders will be scrutinizing for |
| lender to collect part of an outstanding debt from | | | | any irregularities in the transaction. Not surprisingly, too |
| foreclosure and sale of the borrower's mortgaged | | | | many distressed homeowners often try to sell their |
| property or repossession of property securing a debt, | | | | properties to family members or other relatives. A |
| after finding that the property is worth less than the | | | | lender will be wary of potential buyers with a vested |
| book value of the outstanding debt." | | | | interest. As a result, a homeowner will need a |
| While lenders will traditionally pursue other loss | | | | professional who understands loss mitigation |
| mitigation methods to work with the homeowner, when | | | | procedures and the ins and out of short sales and is |
| it seems very unlikely that the homeowner will be able | | | | able to successfully negotiate with the lender. |
| to pay pack the debt-- the lender may choose to | | | | Where exactly did short sales come from? While the |
| agree to a short sale in order to avoid further financial | | | | history is not very clear, the idea grew out of the |
| losses. Admittedly, this "win-win" situation involves | | | | down market of the early 1990s, when lenders were |
| parties who have already resigned themselves to | | | | eager to find new loss-mitigation tools to avoid |
| losing their home and walking away from their | | | | becoming real estate investors and property |
| obligations with a lot less damage to their credit. And | | | | managers instead of what their core functions were |
| as for lenders, they know that repossessing the home | | | | as banks--lending money and collecting interest. |
| (probably with a declining value) will cost them | | | | Once the boom began and foreclosure rates dropped, |
| thousands of dollars to maintain, refurbish, market and | | | | few people needed short sales. Now, as adjustable |
| sell, with no guarantees that it will recoup the same | | | | loans begin to reset and with many real estate |
| amount it might have gained from a short sale. By the | | | | markets currently in decline, short sales are beginning |
| same token, homeowners understand that foreclosure | | | | to show up in the market again. |
| will not only take away their home but also deliver a | | | | |