Short Sales and Deficiency Judgements

Please visit www.NickDailey.com for more information on the Northern Kentucky real estate market.

After a successful short sale has been negotiated, there is a potential liability out there that sellers need to be aware of.  Lenders, or even the PMI company, may come after the owner for a deficiency judgement.  This can be negotiated out, with varying degrees of success depending on the loan servicer, as part of the offer.  But remember, if the home is foreclosed on, it is pretty much guaranteed that a deficiency will be filed. 

So what is the difference between the two possible outcomes? 

A ‘release’ means that the the lender will offer to forego their interest in your property in exchange for less than you owe on their note.  This process allows the property to be sold without satisfying all of the original terms.  This does not mean that the account is satisfied though.  As with anything else, there are advantages and disadvantages.  The biggest plus to accepting a release is that you get to legally convey title to your buyer, and avoid a foreclosure.  The bad part is, you can still be liable for the difference and owe money to your lender after the sale.  This brings up the importance of your hardship letter.  Many people think this is a factor in determing wether or not the offer is accepted, and that’s not entirely true.  When determining whether or not to take your offer, the numbers are what the bank wants to see.  When determining whether or not to file a deficiency, the letter is what the bank wants to see.  Deficiencies are also based on a full understanding of the owners’ current financial status and the likelyhood of repayment.  After you are no longer the owner, the bank doesn’t have any leverage, or security, for their note. 

Since deficiencies are not secured by the property, the terms of the promissary note are usually fairly flexible.  They get you to a payment that they know you can afford, and they won’t normally charge any interest on the note either.  Theses notes can also be renegotiated after a certain amount of time; say 18-24 months.  If you’ve been paying on time, request that the note be marked as satisfied.  Or offer a small settlement if you can.

A ’satisfaction’ is when the lender agrees to release their lien entirely and no furter obligation is incurred.  This is the best-case scenario for owners, and something that I work very hard to make happen for my clients.  In fact, it’s in my cover letter that our offer is for payment in full.  The negative side, yes there is one, is that there may be some tax consequences.  The IRS looks at the forgiven debt as ‘phantom’ income, and they may issue the owner a 1099 at the end of the year.  This does not mean that you will be responsible for the entire amount.  For example: You owe $200K and an accepted offer is for $175K.  That $25K is what you would pay taxes on, not the amount you still owe.  Congress did pass HB3648 (The Mortgage Forgiveness Debt Relief Act of 2007) at the very end of last year to help owners combat this obligation. 

Hopefully this helps give a better understanding of what can happen after the sale.  Please also see my disclaimer post here.

Short Sales and FICO Scores

For more information about the Northern Kentucky real estate market, including full MLS searches w/out registering, please visit www.NickDailey.com.

I just read an interesting post on this topic, and thought I’d share some of it with you.  It details some of the things homeowners can do to help mitigate the damage done to your credit scores after a short sale.

“The short sale can be reported as a foreclosure but more often it is reported as “paid – settled”. This is a definite ding on your credit, but not a severe one compared to multiple delinquencies, charge-offs, foreclosure or bankruptcy. It is a very good idea to do a short sale as compared to running out of savings and ruining your life just to maintain 50 points on a credit score, at least that is how I see it.

It is also possible for the bank simply to remove derogatory reporting. They may say they can’t remove something but in fact they can.

Or, they can substitute “unrated”, which is neither good nor bad. Unrated as an alternative to “paid – settled” is a great outcome but even if you can’t get the bank to agree to this, it is still important to try.

Then there is another move. You can write a letter to the bank demanding this as part of the conditions for the short sale, and then continue with the short sale and complete it. That way you can then challenge the derogatory credit report afterwards and you have a shot at getting it removed based upon your letter. The bank may not have the appetite or staff to handle the challenge, and depending upon your state laws, they may have to remove the derogatory report anywhere from 10 to 30 days later.”

As you can see, there are ways to combat the negative reporting.  Remember, the entire short sale process is a negotiation.  The bank does not have to accept your offer if it’s short.   They make a strategic decision about which outcome (short sale vs. foreclosing) is in their best interest.  In many cases, they’d rather not carry the property as an REO, and will agree to a short sale.  Knowing that you have a bargaining chip in that they don’t want the house, you can request things in return…like how you’d like the transaction reported to the credit bureaus.

For the full article quoted above, please click here.

Sellers’ options when facing foreclosure

When facing foreclosure, it’s important to know what options are available to you as a homeowner.  Normally, the clients that I deal with aren’t in a state of mind that is conducive with making a rational decision very easily.  All of them are stressed out, that should go without saying.  This has been weighing heavily on their minds for the last several months.  Not to mention, the stress from the foreclosure action is normally compounded by whatever got them into the situation in the first place.  Admittedly, some people just got greedy, and borrowed more than they knew they were going to be able to pay back after any adjustments.  For others, life happened.  Maybe a spouse passed, or they’re currently going through a divorce, or a child got sick and now the medical bills are overwhelming, or one income was cut due to a job loss.  There are many, many reasons for why, but in the end, they all conjur the same emotions.  People are left feeling ashamed, embarrased, and many times, helpless.  If a foreclosure does hit your credit report, you can count on your score dropping by approximitely 250 points!!  So what CAN you do as a homeowner to avoid a foreclosure?

Repayment Plan – You may be able to work with your lender to come up with some sort of repayment plan.  Remember, this will increase your payments.  Not only are you responsible for maintaining the payment as originally agreed upon, but now there are several months of unpaid bills (arrears) that need to be caught up.  For example: Your payment used to be $1000/month.  Let’s say you’ve missed 3 payments.  (Banks are somewhat flexible in the timing of the repayment, but it’s usually about 6 months.)  Using 6 months as a guide, you now need to pay $1500/month, on time, for 6 straight months.  This usually only works if the problem that got you in trouble in the first place is FIXED.  Meaning, you and your spouse worked things out, or the company that let you go now has a new position availble for you.

Forbearance – This process suspends or reduces payments…temporarily.  If you have good communication with your lender, and can prove that your current hardship is only temporary, sometimes they will work out a solution for you.  The late payments are not forgiven though.  The arrears are going to be factored back into the loan, usually at the end.  Meaning, if you were 3 months behind, instead of paying off your loan 06/20xx, your last payment will be due 09/20xx.

Loan Modification – It is possible for the lender to restructure your loan for you.  Through this process, the actual terms of the loan are changed.

Partial Claim – For FHA loans only.  In some cases, HUD will loan the borrower $3K-$4K for arrears.  This loan is attached to the property as a lien.

Deed in Lieu – This is commonly known as a voluntary foreclosure.  Basically, the homeowner gives the keys back to the bank and surrenders the property to them.  This will still show up on your credit report as a foreclosure, and is it possible for the PMI insurer to file a deficiency judgement.

Loan Assumption – With mortgage rates dipping into the 4’s a few years back, many lenders removed this clause from their loans.  They knew rates couldn’t stay that low for very long, and if someone wanted to try to assume the payments on a loan, the bank was better off to have them apply for a new loan…with a higher interest rate.  That being said, there are still some loans out there that are assumable.

Bankruptcy – If a Chapter 13 is filed, you may include your house, and no action will be taken for up to 5 years.  Please be aware that on average, only 3% of Chapter 13 filings are successfully completed, and often the foreclosure proceedings will resume after the BK is discharged.

Short Sale – This has become the most viable option for many homeowners who find themselves behind on their mortgage.  Mentally, the owner needs to prepare themselves to leave the home.  The key word in ’Short Sale’…is sale.  Please see my earlier post ‘What is a Short Sale?’

I’m still researching whether or not you’re allowed to ‘buy back’, or ‘lease back’ your home from an investor.  Any insights to this matter would be greatly appreciated as I’ve ready many contradictory articles.

Please see www.NickDailey.com for more information on Northern Kentucky real estate.

What is Pre-Foreclosure?

Pre-foreclosure is the period between when the foreclosing lender files the Lis Pendens or Notice of Default (Depending on whether or not your state is judicial.  In Kentucky they file a Lis Pendens.), and the time of the actual Sheriff Sale.  This is the time when you should be working REALLY hard (i.e. Contact Me) to figure out your options.  In some ‘quick’ states, this can be a matter of just a few weeks.  In KY, you normally have between 120-150 days before any court ordered action is taken against your property.  This depends on the county.  You can also help buy yourself some more time if you make sure to respond to the initial attorney’s filing within the time frame allotted, which is around 3 weeks.   Either the homeowner, or their attorney can file the letter.  The response needs to be filed in the same clerk of courts office that sent the letter, and you also need to send a copy of the letter to the attorney who is handling the foreclosure for the bank within 3 days of filing.

Most of the short sale (for more on short sales see my post What is a short sale?) clients that I deal with have a property in pre-foreclosure.  When a property is in this state, the bank has specific departments to handle the file.  It’s commonly referred to a the Loss Mitigation, or Workout Department.  These departments try to remedy the file before it gets passed off to their REO (Real Estate Owned) division.

Please see www.NickDailey.com for more information on the Northern Kentucky real estate home buying/selling process.