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Should I Short Sell My Home? – Truths and Myths About Short Sales

If you’ve talked to any real estate agents recently, you’ve probably heard about the increase in short sales currently taking place. Surprisingly, there are people who short sell their home and are able to buy another home soon after. How can this happen?

If you’re finding yourself “underwater” in your mortgage, meaning that you owe more than what your home is worth, you’ve probably asked yourself the question – “Should I short sell my home?”

Short selling your home may be a difficult decision to make since it may affect your credit and potentially prevent you from getting another loan for several years. However, if you decide to short sell your home it may be the best time to do so now.

As a homeowner, who bought a home before the housing bubble burst, I’ve been doing a lot of research in terms of options available to people like me, who are underwater. Unfortunately AND fortunately, I’m not in a financial hardship and there aren’t many options for those of us who can make the house payments but want to sell their home due to other circumstances (new job).

I’ve worked hard on having a good credit score, after all, credit is everything nowadays. So, not making my mortgage payments is not an option for me. A loan modification seems not to be an option either, unless I’m late on my payments or in a financial hardship. So, my only option left is trying to short sell my home.

After speaking with several other real estate agents, I learned about some facts and myths that are out there about short sales that I wanted to share.

Myth: I won’t be able to buy another home for several years after short selling.

Truth: You may be able to buy an FHA-approved home after a short sale only if you’ve never been late on your payments and your new home is cheaper than the one you’ve just sold.

According to a letter by the Department of Housing and Urban Development (HUD) issued in December 2009, Borrowers are considered eligible for a new FHA-insured mortgage if 1) they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and 2) the proceeds from the short sale serve as payment in full.”

It’s also important to note that a person who is interested in short selling their home in order to buy a new one, will need to buy a smaller and cheaper home if they’re interested in buying soon after the short sale took place. Also, keep in mind that if you decide to buy a home right after a short sale, you’ll most likely have to pay a higher interest rate than someone who has never defaulted on a debt.

Guidelines are different for each lender. For example, Fannie Mae will not allow you to buy another home for a minimum of two years, even if you’re current on all your payments.

Myth: I will need to pay income taxes on the forgiven mortgage debt.

Truth: According to the Mortgage Debt Relief Act of 2007, if you’ve sold your home for less than what you owe, you won’t have to pay income taxes on the difference. (There are certain restrictions.)

According to the IRS, if you sold your primary home (you’ve lived in this home for at least three out of the last five years) through a short sale, you may not owe any taxes on the canceled debt. However, this act expires in December 2012. So, if you decide to list your home on November 2012 but your home doesn’t sell until February 2013, you won’t be covered under this act and you will most likely owe taxes on the difference.

However, it’s always wise to consult your tax advisor before making any tax-related decisions. A real estate agent familiar with short sales will also be able to give you more information about the Mortgage Debt Relief Act.

Myth: My credit will be ruined if I short sell my home.

Truth: Your credit score will suffer as a result of a short sale but the impact is different for everyone.

There isn’t a sure way to know exactly how much your credit score will suffer if you short sell since there are many factors that determine your score. Generally speaking, if you’ve never been late on a payment (credit card, mortgage or car payment, for example), then your credit score will decrease as a result of a short sale but not as much as if you had missed payments.

Also, the way that the bank reports the short sale to the credit bureaus will make a difference in the severity of the impact on your credit score. This is why it’s very important that you understand the lender’s terms BEFORE you agree on how the mortgage loan will close and be reported to the credit bureaus. If your mortgage lender reports that your mortgage has been “paid in full,” then your score won’t be hurt as much as if it was reported as “settled for less than full balance.”

Myth: I won’t be able to short sell my home unless I’m late on my payments.

Truth: You may still be able to short sell if there are other circumstances that prevent you from keeping your home, such as relocating for a job.

It’s true that lenders will give more consideration to homeowners that are late on their payments since it shows a hardship. However, if you are able to explain to your lender in your “hardship letter” why you need to sell the house (e.g. lost your job and had to relocate to another area to find another job), your lender may approve your short sale.

All these guidelines mentioned above could change at any time. Consulting a tax advisor, real estate agent and an attorney before making a decision will help you make a more educated decision.

We hope that this article helps you come up with questions to ask as you determine whether a short sale is for you. If you have other questions feel free to let us know.

 

Aloha


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Making an Offer on a Short Sale? What You Need to Know

Are you looking to buy a new home? Are you thinking that now’s a great time to find bargains? Before you make an offer, it pays to know a little about the seller’s situation.

If a home is being sold for below what the current seller owes on the property—and the seller does not have other funds to make up the difference at closing—the sale is considered a short sale. Many more home owners are finding themselves in this situation due to a number of factors, including job losses, aggressive borrowing against their home in the days of easy credit, and declining home values in a slower real estate market.

A short sale is different from a foreclosure, which is when the seller’s lender has taken title of the home and is selling it directly. Homeowners often try to accomplish a short sale in order to avoid foreclosure. But a short sale holds many potential pitfalls for buyers. Know the risks before you pursue a short-sale purchase.

You’re a good candidate for a short-sale purchase if:

  • You’re very patient. Even after you come to agreement with the seller to buy a short-sale property, the seller’s lender (or lenders, if there is more than one mortgage) has to approve the sale before you can close. When there is only one mortgage, short-sale experts say lender approval typically takes about two months. If there is more than one mortgage with different lenders, it can take four months or longer for the lenders to approve the sale.
  • Your financing is in order. Lenders like cash offers. But even if you can’t pay all cash for a short-sale property, it’s important to show you are well qualified and your financing is set. If you’re preapproved, have a large down payment, and can close at any time, your offer will be viewed more favorably than that of a buyer whose financing is less secure.
  • You don’t have any contingencies. If you have a home to sell before you can close on the purchase of the short-sale property—or you need to be in your new home by a certain time—a short sale may not be for you. Lenders like no-contingency offers and flexible closing terms.

If you’re serious about purchasing a short-sale property, it’s important for you to have expert assistance. Here are some people you want to work with:

  • A qualified real estate professional.* You may have a close friend or relative in real estate, but if that person doesn’t know anything about short sales, working with him or her may hurt your chances of a successful closing. Interview a few practitioners and ask them how many buyers they’ve represented in a short sale and, of those, how many have successfully closed. A qualified real estate professional will be able to show you short-sale homes, help negotiate the purchase when you find the property you want to buy, and smooth communications with the lender. (All MLSs permit, and some now require, special notations to indicate that a listing is a short sale. There also are certain phrases you can watch for, such as “lender approval required.”)
  • Title officer. It’s a good idea to have a title officer do an initial title search on a short-sale property to see all the liens attached to the property. If there are multiple lien holders (e.g., second or third mortgage or lines of credit, real estate tax lien, mechanic’s lien, homeowners association lien, etc.), it’s much tougher to get that short sale contract to the closing table. Any of the lien holders could put a kink in the process even after you’ve waited for months for lender approval. If you don’t know a title officer, your real estate attorney or real estate professional should be able to recommend a few.

Some of the other risks faced by buyers of short-sale properties include:

  • Potential for rejection. Lenders want to minimize their losses as much as possible. If you make an offer tremendously lower than the fair market value of the home, chances are that your offer will be rejected and you’ll have wasted months. Or the lender could make a counteroffer, which will lengthen the process.
  • Bad terms. Even when a lender approves a short sale, it could require that the sellers sign a promissory note to repay the deficient amount of the loan, which may not be acceptable to some financially desperate sellers. In that case, the sellers may refuse to go through with the short sale. Lenders also can change any of the terms of the contract that you’ve already negotiated, which may not be agreeable to you.
  • No repairs or repair credits. You will most likely be asked to take the property “as is.” Lenders are already taking a loss on the property and may not agree to requests for repair credits.

The risks of a short sale are considerable. But if you have the time, patience, and iron will to see it through, a short sale can be a win-win for you and the sellers.


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Prepping Your Home for a Successful Sale

 

 

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It may be a seller’s market again, but you still want to move your home quickly and get the best price for your property. Here are some tips that will make selling your home faster, less stressful, and more profitable.

1. Choose the right real estate agent. It’s important to hire a professional that knows just how to showcase your home to its best advantage. Get referrals from friends and family, and set up interviews with agents you think you can work best with. Be sure to ask about MLS listings, setting up mobile advertising, and open houses. You’ll be working closely with the agent and relying on them to help you set pricing and draw up your contract; don’t just take the first person that comes along.

The right agent will even be able to assist you with the other tips on this list. Remember, real estate agents are experts at buying and selling homes, and they are on your side: They want you to sell your home quickly and for a great price, because, after all, that is their business.

2. Create an amazing first impression. This means cleaning, clearing, and de-cluttering. Your home needs to be almost a blank canvas upon which the buyers can project themselves and their possessions. Strive to make your home look as much like a model home as you can. From the driveway to the basement, your property needs to be neat and tidy, personal items should be stowed away, rooms should be bright and cheerful, and you should do all you can to make each space look large and inviting.

3. Make some minor tweaks. If your home needs a little help to look its best, select quick and inexpensive updates that will give you the most bang for your buck. A coat of neutral paint, professionally cleaned carpets, and a new dishwasher or even new drawer pulls can make a huge difference to a buyer on the fence.

4. Get a home inspection. This one is a bit unusual, but it could save you some heartache in the end. Your buyers will almost certainly insist on an inspection, so instead of getting blindsided by dry rot in support-bearing beams or electricity that’s not up to code, you can know what’s coming, choose what you wish to address, and price accordingly.

While many factors are on the side of the seller in today’s market — including low inventories in many desirable neighborhoods and slowly rising mortgage interest rates — it’s still in your best interest to put some effort into getting your home into the best shape for showings that you possibly can.