Arizona, suffering through one of the worst real estate markets in memory, is considering HB2584, legislation that would give homeowners considering short sales the same legal protection provided to those facing foreclosure. According to Bob Hertzog, owner of Summit Home Consultants (who specializes in helping homeowners through the Phoenix short sale process), HB2584 would guarantee that homeowners would no longer be forced to negotiate with lenders to absolve them of financial responsibility for any shortfall between the amount paid for a short sale property and the amount owed on the mortgage at the time the short sale transaction is competed.
Bob Hertzog, of Summit Home Consultants, Inc., a Phoenix residential real estate brokerage that specializes in short sales, points out that in 2011, over 23,000 short sales were completed in the Metro-Phoenix market. â€œThis legislation is hugely important for the average homeowner contemplating a short sale,â€ Hertzog said. â€œWhen homeowners are looking at a short sale as a possible solution, they have a few things to consider. One of those factors is the issue of deficiency balances. If homeowners will be on the hook for deficiencies after a short sale, theyâ€™re better off just letting the property go through the foreclosure process, as they are guaranteed full deficiency protection under the current statutes, which have been in place since 1971.â€
Hertzog said almost two-thirds of Arizona homeowners are currently underwater on their mortgages, which means that HB2584 has the potential to help thousands of Arizonans, although the majority of those who would benefit from the legislation are those facing foreclosure, currently going through severe financial crises, or have lost their jobs.
Some elected officials, including Senator Jack Harper (R-Surprise) are promoting competing legislation that would eliminate deficiency protections altogether for homeowners facing foreclosure. Hertzog said he believes that legislators are battling for the heart and soul of Arizonaâ€™s real estate market.
â€œLegislators are torn between coming down on the side of homeowners or lenders. Senator Harper has decided that lenders need protection from homeowners dealing with falling home values, sky high unemployment and tight credit,â€ Hertzog said.
â€œLegislators are going to have to decide whether lenders deserve more protection, or whether itâ€™s high time that Arizonans who try to do the right thing by selling homes they cannot afford with short sales deserve the same protections they would have if they just let the foreclosure process play out. Thatâ€™s what this is all about.â€
No vote is currently scheduled on HB2584.
What is a Short Sale?
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property. In addition,Â the property owner cannot affordÂ or choosesÂ not toÂ repay the liens full amounts.
Therefore,Â the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency.Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties. Â That is why finding the right short sale specialist is paramount.
Does a Short Sale Hurt My Credit?
This question is asked very frequently and involves a number of unique variables. The first thing to keep in mind is that the moment you are 30+ days behind on your mortgage payment, your bank has the right to report to all of the credit bureaus that you are 30 days behind on your payments. When a late payment is reported to the three major credit bureaus, it does have a direct affect on your credit.
After going through a Short Sale or a Foreclosure, most people have multiple 30, 60, and 90+ day late payments reported on their credit report. When the actual Short Sale is completed, most banks will report to your credit report that your account was â€œpaid in full for less than the full amount.â€ Your credit report may also be marked as â€œsettled.â€ It is important to keep in mind that each lender has a different way of reporting that a Short Sale was done, but this is the most common language used. If your home were to go to Foreclosure you would most likely see the bank report â€œForeclosureâ€ on your credit report. It is difficult to gauge how much damage will be done to yourÂ credit score when comparing a Short Sale to Foreclosure.Credit experts will agree that neither a Short Sale nor a Foreclosure is favorable to your credit or credit score, however, the impact of a Foreclosure is much worse.
We strongly advise you to work with a Credit and Credit Scoring Expert for more specifics on this topic, and ways in which to improve your credit after the Short Sale is complete. Recently, many of our clients were able to Short Sale their homes without ever missing a payment. Therefore, they do not have any late payments reported to their credit. When there are no late payments on your mortgage, your credit score is generally not affected. It is possible to maintain a high credit score by completing a Short Sale without missing payments on your mortgage and other bills. Please be aware though, that your lender will still report that a Short Sale was done. So, while you may not see your credit score drop if you continue to make payments through the completion of the Short Sale, youâ€™ll still likely have your account marked as â€œpaid in full for less than the full amountâ€ and/or â€œsettled.â€
What Will Happen on My Tax Return if I Do a Short Sale?
There may be tax ramifications to a Short Sale but every situation is unique. You may have heard, â€œDonâ€™t do a short sale because you will get a 1099 and have to pay taxes on the difference between what you owed on your home and what you sold it for or the amount the bank wrote off.â€ This may be true, but this is not the whole story.
If you borrow money from a lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender.
When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
The thing that most people donâ€™t know or donâ€™t tell you is that with a Foreclosure, you will also get a 1099. In the case of a Foreclosure the 1099 is called a â€œ1099-Aâ€Â and the â€˜Aâ€™ stands for â€œAcquisition or Abandonment of Secured Propertyâ€.Â It is important to know that while there are many differences, the tax consequences for the â€˜Câ€™ and the â€˜Aâ€™ are the same. Because of The Mortgage Debt Relief Act of 2007 you may not even be required to pay taxes on the â€˜incomeâ€™ as shown on the 1099-C. However,Â you shouldn’t just assume that you wonâ€™t have to pay. While we are very good at successfully closing Short Sales, we are not tax experts.
Before making your final decision, first consult a CPA or Tax Preparer.You may also want to check out some information regarding The Mortgage Debt Relief Act of 2007.Â It provides relief to many, many homeowners. For more information on the Mortgage Debt Relief Act, how it works, who it applies to, and more, please read more directly from the IRS website. Read The Mortgage Debt Relief Act of 2007.
Why Would a Bank Say Yes?
With foreclosures on the rise in the US, banks are looking for any way they can to minimize their foreclosure losses.Â Basically, it is much more cost effective for a bank toÂ agree toÂ a short sale rather foreclose on a home.
Banks arenâ€™t in the business of owning real estate and collecting monthly mortgage payments, so a bank will take a minor loss in a short sale to start that payment cycle again.
In addition, if the home is in foreclosure, a bank must pay for upkeep, insurance, and other costs. Â Plus, through the foreclosure process, the bank would incur legal and court fees.The truth of the matter is that a bank can minimize their loss by ten, twenty, even thirty percent in a short sale over foreclosure.