Consider First All Alternatives
For many homeowners with their homes ‘underwater,’ i.e., the loan[s] against the home exceed the value of the home, the knee-jerk reaction is to short sale the property. While a short sale may indeed be the best solution for a particular homeowner, the homeowner is ill-advised to proceed without first considering all alternatives, in order to make an informed decision. Consulting legal counsel experienced in residential real estate matters will greatly assist the homeowner in assessing options and choosing the best course of action. Following are options other than a short sale:
- Loan Workout: The lender may agree to loan reinstatement, a repayment plan, or forbearance, or the homeowner may be eligible for a claim advance.
- Loan Modification: The lender may agree to change the original loan’s terms to make the payments more affordable for the homeowner.
- Deed-in-Lieu of Foreclosure: The lender may permit a homeowner to convey the home to the lender in exchange for full relief.
- Work-Out Sale: The lender may permit the home to be sold and the loan to be paid off within a specified time period.
- Refinance: The homeowner may be able to refinance the loan with another lender.
- Bankruptcy: Filing for bankruptcy protection may be the homeowner’s best option to protect the homeowner’s total financial situation.
- Foreclosure: Allowing the lender to foreclose [or conduct a trustee sale] on the property may be the homeowner’s best option.
Short Sale Considerations
If, after reviewing all alternatives, the homeowner concludes that a short sale is the best option, following are some issues related to the process:
- Qualified Real Estate Professional: Like the real estate mantra—location, location, location—the choice of a competent, experienced real estate broker is critical, especially in handling short sales. And, best of all, the lender and not the homeowner generally pays the real estate commission.
- Short Sale Documentation: The real estate broker can assist the homeowner in assembling the extensive documentation required by the lender. Each lender has its own criteria.
- Property Fair Market Value and Total Debt: The seller must show the lender[s] that the unpaid loan balance exceeds the estimated fair market value of the home. The entire loan balance must be quantified.
- Debt May not be Discharged in a Short Sale: Even if a lender agrees to a short sale, the lender may not agree to forgive the total debt. A homeowner should consult legal counsel to determine whether any ‘anti-deficiency protection’ is available.
- Tax Effect: Relief of debt may be treated as income for tax purposes. Again, a homeowner should consult legal counsel to determine whether debt relief will be recognized as income for federal or state tax purposes.
- Credit Score: The impact of a short sale, versus other alternatives, depends on numerous factors. In order to qualify for a loan to purchase another home, the ‘short sale’ homeowner will likely suffer a waiting period.