short sale

June 23, 2016 by Todd Murphy

Is A Short Sale Or Deed In Lieu Of Foreclosure Better For My Credit Than A Sheriff Sale?

Many people ask, “Isn’t a short sale or deed in lieu of foreclosure better than a sheriff sale on my credit?”

To answer this bluntly, no. Unfortunately, if your home is in foreclosure, your credit was already ruined once your loan went into default after missing 3 consecutive mortgage payments.

There is a lot of misinformation on the internet regarding the potential benefits of s short sale or a deed in lieu of foreclosure. I don’t recommend either of these two strategies, unless your lender is offering you a significant sum.

Both a short sale and a deed in lieu of foreclosure assume you either didn’t qualify for a loan modification, or have chosen not to apply for a loan modification because you want to move out of the home. Sometimes, a homeowner is trying to end the lengthy foreclosure process sooner through either of these two solutions, and that may be another reason to consider either of them.

One factor that make either a short sale or deed in lieu of foreclosure nearly impossible is if there is a second mortgage on the property, which requires you to negotiate with both lenders simultaneously and usually requires the first lender to share some of the proceeds with the second mortgage holder, when at a sheriff sale the second mortgage holder wouldn’t receive any funds.

Short Sale

Often times, the only one who benefits from a short sale is the realtor who collects his/her commission once the home is sold. A short sale involves an agreement with your lender, or bank, that when/if the home is old for less than what is owed, the lender will not come after you for any amount owed on the home after the sale.

A short sale also requires the right type of buyer; the buyer must be willing to patient, often for months, while the lender determines whether or not they will prove the short sale. An investor with cash would be the most desirable potential purchaser. A good realtor will carefully screen the buyer prior to making an offer to be sure he/she has the staying power to see the deal through to a closing. Numerous transactions have fallen apart after months of negotiating because the potential buyer was unable to continue the wait.

The most significant reason not to do a short sale is: you may still owe income taxes on the difference between he sale price and the amount owed, which would’ve been forgiven by the lender. The reason for this is that once the bank forgives your debt amount, the IRS then treats that amount as “income.”

However, a chapter 7 bankruptcy could save you from owing a devastating amount to the IRS – to learn more, read our post: Don’t Save Your Home From Foreclosure: Prepare For A Bright Future With A Fresh Start

If you do choose to do a short sale, it is crucial that you get an agreement with your bank in writing, insulating you from them taking any further action in trying to collect deficits after the sale.

One possible advantage of this option is that you may be able to negotiate with your bank for them to allot you money for moving. This could help you get back on your feet again after having gone through the foreclosure process, but, this possibility is extremely unlikely with a short sale.

Deed In Lieu of Foreclosure

A deed in lieu of foreclosure essentially requires that you hand over the keys of your home to your bank for nothing in return. The bank will cancel your debts for the deed of your home.

With a deed in lieu of foreclosure, you run into the same aforementioned tax issues that you would if you did a short sale. Once you hand over the deed of your home to the bank and they forgive the amount that you owed, the IRS treats that amount as income that must be taxed.

Instead of a deed in lieu of foreclosure, if you did a chapter 7 bankruptcy, you would not owe any money in taxes because the amount owed on your home would not be forgiven, but it would be discharged, and the IRS could not tax you; to learn more about avoiding tax liabilities with a chapter 7 bankruptcy, read our post: When Is A Chapter 7 Bankruptcy Useful?

Are Either Of These Options Right For Me?

Unless, your lender is offering you a hefty bonus for doing a short sale or you are trying to shorten the process so that you can move out of the home sooner, then neither of these options offer any real benefits to the homeowner.

Applying for a short sale or deed in lieu of foreclosure is no different than applying for a loan modification; in both situations you must submit a hardship letter and a significant amount of supporting financial documentation. Often, if you qualify for a short sale, you would’ve qualified for a loan modification.

Consider these factors very carefully before you decide to go through with either of these options.

December 22, 2013 by Todd Murphy

What is a Short Sale of Real Estate?

Short sale is a real estate transaction with the sale price less than the remaining balance on the mortgage – that is, the sale of a house at a loss, realizing its negative equity.

If other options are not available—a homeowner is unable to qualify for a refinance or loan modification due to loss of income or a high debt-to-income ratio—a short sale may be the last alternative to avoid foreclosure.

Similar to an ordinary sale, but with the acknowledgment of the bank that no other option exists, the home is listed with a real estate agent and the sale proceeds as an ordinary sale would. The bank needs to approve a short sale, and to see supporting documentation regarding your financial cirucumstances.

It is important to be aware of the possibility of a “deficiency judgment,” wherein the mortgage holder can sue for the difference between the amount of the proceeds and the amount outstanding on the loan. Your attorney should insist on a deficiency waiver in a short-sale agreement.

At Todd Murphy Law we can help in this process, negotiating with the bank to obtain approval for the short sale, ensuring that the application is complete, and negotiating a waiver of deficiency.

December 22, 2013 by Todd Murphy

What is a Deficiency Judgment?

New Jersey is a “recourse state” in mortgage law, permitting lenders recourse in the form of a lawsuit to recover the difference between sale proceeds and the balance on the mortgage in the event of short sale, deed-in-lieu, or foreclosure.

There are important limitations in New Jersey law, among them that the suit must be filed within 3 months of the sale. If the suit is filed and the judgment obtained, the lender has 20 years to attempt to collect it. In the event of such a judgment, bankruptcy is a tool that can be used to wipe the debt.

Will I be affected by a deficiency judgment?

Deficiency actions are more likely to occur when the borrower has other assets or is not delinquent on other loans, creating the appearance of the ability to repay. If the borrower is late everywhere and has no assets, the lender may instead issue a 1099 to the borrower, declaring the amount of the deficiency as a payment to the borrower. In this instance, the borrower may have incurred a tax liability, depending on when it happened. The Mortgage Forgiveness Debt Relief Act of 2007 eliminates such tax liabilities if the sale occurred between 2007 and 2013.

There are several defenses against deficiency judgments. One is a counterclaim regarding the fair market value of the residence. Another is negotiating a waiver of deficiency in the sale. The final defense would be a bankruptcy filing after a judgment.

When confronted with the possibility of a deficiency judgment, qualified legal advice is essential.Todd Murphy Law can help every step of the way dealing with deficiency and its impact on your financial future.

Call Todd Murphy Law today!.