Ok, I have been reading that everyone is up in arms on this one. People are saying this is the end of housing. Realtors everywhere are posting reasons why short sales are better than a foreclosure. We need to bring some sanity to this problem.
If you are a homeowner that is facing a point today where you can no longer afford your mortgage or it no longer makes sense AND you owe more than your home is worth………………….DO NOTHING!
Here is the deal. It is NOT a real estate problem. It is a financial and legal problem. You signed a Deed of Trust or Mortgage. That is a contract. You are facing a point when you are going to default on that contract. Why would you discuss with a Realtor a contract breach? Before you even consider a Short Sale, you need to understand your legal rights and obligations.
Ok, so you get it and instead of calling your Realtor to sell your home you reach out to an Attorney who is the only person licensed to give you the legal advice necessary to make the proper decisions. What is it you want to know first? You want to know “If my home goes to foreclosure, will I owe a deficiency on that mortgage(s)”?
If you are going to jump out of a plane you don’t do it without a parachute and you sure don’t jump without understanding how high you are and where you are going to land. So, you talk to law firm and discover whether or not if you allow the home to go to foreclosure due to non-payment will you have a deficiency risk? So let’s say the Law Firm determines that you do not. Deficiency is a demand from the lender for the difference between your Note amount and what the home forecloses for or Short Sells for. So, if you have no deficiency risk, does that mean just let the home go to foreclosure? NO!
Short Sale, successful and proper Short Sale, is always better than a foreclosure. Which brings us to the headline. Fannie Mae rolls out their new version of DU/DO which updates the new underwriting guideline that states that you will not qualify for a Fannie Mae mortgage if you have had a foreclosure in the last 7 years. Oh Dear God! you might be thinking. Well, keep reading.
So, you have been built up about all this fear and social conditioning that foreclosure is bad and Short Sale good. Well, not so fast. First, if your short sale is successful and proper i.e. You are a borrower with a non recourse mortgage and the lender agrees to the short sale with NO cash contribution nor promissory note, and an Attorney puts in writing that the language in the Approval from the lender has the express release from deficiency….Awesome! According to Fannie you will, assuming you restore all of your other credit, allow you to qualify for another mortgage within 2 years. That is great. But, wait, what if the lender makes a demand for a cash contribution or a promissory note?
DO NOT be talked into closing a short sale by anyone before you understand this. What is your credit report worth? Is it worth $3,000 for the privilege of owning another home in two years? $4,000, $8,000 $15,000? Understand, your decision to make a cash contribution to close a short sale is a cost to purchase a privilege to be a homeowner sooner with Fannie and to purchase your credit report for the intangible benefit of a better credit score with a Short Sale than a Foreclosure. That is it! Nothing more.
Any real estate professional that convinces a homeowner to do this is in Breach of their Duty to their client. The concept is that the homeowner should not suffer more than the result that would occur if you did nothing. So, if you would owe NOTHING by letting the home go to foreclosure then why would you pay a cash contribution? That is your bottom line. So, ask yourself. What is the value of being a homeowner?
I will tell you that you need to pay close attention to the standard deduction on the Tax Return. Social Conditioning has convinced everyone that you must have your interest deduction. Truth is, at today’s interest rates, most people at a mortgage amount below $300,000 is failing to get much of an interest deduction above what would have under the standard deduction. Secondly, the reduction of taxable income in this tax bracket results in only hundreds to a couple thousand dollars in tax savings on the high side. So, to own a home, you have more expenses and frankly you may find that rental is much cheaper. Bottom line for most, this is an emotional decision as they want their piece of the American Nightmare.
Short Sale is a good solution. Less than half of all Short Sales listed even close. There are many reasons whey they blow up and “Greenmail” demands from lenders are just one of them. Know what your legal rights and obligations are before you list the home, stop making your payments, cash out your retirement account or just walk away. The answers might surprise you.