When Mortgage Modification Not Viable, Short Sale Deemed Most Practical for All Involved In Foreclosure Case

Our country’s real estate market has been in a state of stagnancy, if not decline. It is no secret that the current economy has been the cause of frequent unemployment and the reduction of income; consequently, property is being sold at lower prices to a seemingly empty lot of buyers. Although property today is being sold at such exceptionally low prices, lenders maintain their usual mortgage rates, while homeowners begin to recognize that their mortgage balances are actually higher than their property value. Thus, homeowners now face foreclosure more often than not – since 2007, millions of foreclosure filings have flooded courthouses throughout the country, particularly here in Florida.  In response to the real estate market’s current state, homeowners facing foreclosure have turned to a simpler, more beneficial solution to their property dilemmas: modifications or short sales.  If would be great to hear the foreclosure issues being faced by my readers, so feel free to post your personal experiences in the comments section below.

In addition to defending the foreclosure lawsuit, property owners should seek a modification of the mortgage or, when a modification is not viable, short sale of the property before the foreclosure sale takes place.  A short sale, also called a short payoff, occurs when a mortgage lender, usually a nationally chartered bank, accepts less than the actual mortgage balance due in order to avoid taking title to the property through foreclosure – essentially taking on the responsibility of selling the property along with the negative affect it has on their balance sheets.  Through a short sale, lenders avoid carrying costs and maintenance fees while receiving a substantial portion of their money.

Although the procedure to complete a short sale is complicated and time-consuming, a short sale benefits the property owner as well. The property owner is not allowed to receive any money at closing, but they do escape, in most cases, the remaining loan payments (in other words, the deficiency, which a deed-in-lieu of foreclosure or a foreclosure judgment does not avoid) and also reduce the extent of the damage made to their credit (although a short sale still harms one’s credit score).  While the lender will issue a 1099-S to the property owner for the portion of the loan that has been forgiven, the Internal Revenue Service considers this a non-taxable event when the property is homestead.  This is not necessarily the case with investment or commercial property.  The property owner may still avoid taxation when a 1099-S is issued on non-homestead property by being deemed “insolvent.”  Regardless of the circumstances, it is highly recommended that one seek the advice of a Certified Public Accountant regarding tax liability before commencing with a short sale.

The process of completing a short sale requires much communication with the mortgage lender detailing the reasons the mortgage cannot be completely paid off, for example; therefore seeking a professional may be beneficial. During the short sale process, an experienced attorney has the ability to provide the lender with a proper and legal explanation for the hardship and provide the necessary documentation to prove it – while still protecting the interest of the property owner. And at NO COST to the property owner as the lender picks up the tab.  An attorney will also have the capacity to find a suitable real estate agent to manage the marketing of the property in a way that is acceptable to the lender. The presence of an attorney throughout the short sale will provide legal guidance and security, resultantly making the short sale transaction as smooth and as simple as possible for the property owner at no expense.  While I see no disadvantage in hiring an attorney to assist you in a short sale (after all, an attorney has a duty to protect his or her client’s best interests, while real estate agents and other professionals do not), I welcome feedback should you feel any apprehension in hiring one.   

Finally, the homeowner should consider the fact that a short sale transaction will come at little, if no, cost to them.  At a time when cash flow is scarce, and a modification of the loan is not viable, this option is best.  Avoiding the foreclosure sale and any deficiency judgment is tantamount.  The short sale accomplishes this and more.