During times of recession and economic downturn many homeowners find themselves in the position of having to decide what to do with real estate that they can no longer afford. According to data gathered by the California Department of Real Estate, in 2009, nearly three-quarters of all sellers in California sold their homes as a result of financial difficulties. And according to the National Association of Realtors, the number of short sales has increased nationwide. Whether it is an investment property, a vacation property, or the family home, understanding your available options and their outcomes is important if you need to decide what to do with real estate for which you worked so hard, but can no longer afford.
What is a Short Sale?
A “short sale” in real estate refers to a sale of real estate that falls short of the loan balance owed on the mortgage. When a property is sold in this manner, the lender allows the property to be sold for an amount less that what is owed to them. Under a short sale the lender may agree to “write-off” the difference between what remained on the loan balance and what the property actually sold for. It does not necessarily guarantee that the difference will be forgiven by the lender; instead, this is something that has to be negotiated with the lender.
What is a Foreclosure?
A “foreclosure” is a proceeding that allows a lender to end all ownership rights when the owner of a property stops making mortgage payments and is in default. Basically it allows the lender to reacquire the property. While each state is different, in California the lender generally has a right to pursue a property owner for the deficiency owing after the foreclosure has taken place. This means that if your property is not sold, or the purchase price was not enough to cover the balance on the loan, the lender can turn the loan over to debt collectors, or sue you for the balance still owing, and/or pursue payment from you even if you file for bankruptcy.
However, there is an important exception to this rule: the lender has no right to collect a deficiency from you if the loan was used for the original purchase of your primary residence, and you still live there. If you refinanced your home, or if the loan was for a second home, commercial property, or investment property, this exception does not apply.
Why a Short Sale May Be a Better Option for a Distressed Homeowner
There are a number of reasons that a short sale may be in the best interest of a seller who needs to let go of a property. One important advantage to a short sale pertains to future home purchases. For example, Fannie-Mae, the Federal National Mortgage Association, adjusted their guidelines in 2008 to allow an individual that successfully completes a short sale to be eligible for a Fannie-Mae baked mortgage package after only two years. In contrast, an individual who loses their home to a foreclosure will not be eligible for a Fannie Mae backed mortgage for five years.
Another advantage to a short sale would be in the area of credit score issues. The impact of a foreclosure can be a downgrade of your credit score anywhere from 200 to over 300 points, and it will affect your score for a minimum of three years. However, the impact of a short sale on your credit score can be as little as 50 points and its effect can be as brief as 12-18 months.
How to Start a Short Sale
If you think you might be interested in short-selling your home or other real estate, it is best to talk to a legal expert about the process and related legal issues, such as potential tax consequences to you when part of your mortgage loan is forgiven. The skilled real estate attorneys at San Diego Law Firm have specialized experience in handling short sales as well as a unique knowledge of the real estate market. To schedule a consultation, please call San Diego Law Firm at 619-794-0243.
