Mortgages are, for most people, the biggest risk and debt they take on in this life. The housing bubble causing rapid gain in property value and the laxity of the financial sector in it’s loan practices contributed to a huge case of overconfidence in many homeowners. Many thought the home values would continue to skyrocket…an endless source of income. All you need to do is keep refinancing for the rising assessed value of your house. Simple! Plenty of money for home improvements, vacations, interior upgrades etc. When home values plummeted as the Housing Bubble burst, suddenly homeowners found themselves owing a huge mortgage that exceeded the value of the property it was owed on. Not a big deal, if the homeowner had no plans on moving, as long as other factors like expenses, employment, investments etc. continued moderately favorable. The trouble was….they didn’t.
As more and more people lost jobs and discovered that they either couldn’t find a job right away or they couldn’t make what they once did, consumer confidence crashed and mortgages started to go into default. Investors who gambled on a collection of funds based on risky lending practices suddenly found their investments worthless as the number of homeowners in their collection of funds stopped paying their mortgages. Foreclosures shot up. That glut of foreclosures has been steadily pounding the housing market, reducing home values in their areas, crippling bank’s profit margins and destroying the foreclosed homeowner’s credit. With continuing shaky employment numbers and a weakly stabilizing housing market, consumer confidence is still mighty low. Major purchases are being put off unless it’s absolute necessity. Home Improvement Industry, Retailers and the Manufacturing Sector have felt the brunt of this badly, resulting in more layoffs, reductions and a renewed cycle of uncertainty.
Home prices have fallen so dramatically from their peak, that nearly 30 million people have negative equity. They owe more on their mortgage than their home is worth. Like I said earlier, if other factors remain the same, the best option for many is to stay in the home until the market shifts. It always shifts. Experts are currently predicting the shift back to profitability to up-swing between now and 2015 when it really begins to gain traction. What do you do if the situation has reached crisis proportions now and you just can’t wait for the light at the end of the tunnel?
To try and escape “Underwater” Mortgages, many utilized the short sale option. Short sales are nasty, messy processes, but considering the economy, the financial market and the housing market, you should know how they work.
In years past, a major issue with using short sales has been that under IRS law, a homeowner owes taxes on the “income” gained from discharging debt on their principal residence. The Mortgage Debt Relief Act of 2007 lets homeowners exclude that, until the law expires in 2012. This makes short sales far less painful for debtors until the end of this year anyway.
Say a homeowner just can’t pay his mortgage, or is “underwater”, he can ask his lender, or lenders, to accept a short sale. What do you do if your not in that situation? You can still ask, IF….you can prove that house simply can’t be sold for what’s remaining on the mortgage. If the lender or lenders agree, they will accept an offer on the house for less than the value of the mortgage balance. That’s not necessarily selling below market value. A homeowner who paid off his mortgage and sells a house worth $200,000 for $150,000 is not utilizing a short sale. In order for it to be a short sale, the lender has top agree to take on part of the loss on the remaining mortgage balance. For the homeowner and the bank, a short sale is frequently WAY, WAY better than a foreclosure. The bank looses it shirt on home value when entering foreclosure. That doesn’t take into consideration all the time and expense of just beginning the foreclosure process. For the homeowner, a short sale causes less damage for a shorter duration to your credit than a foreclosure would. Once the lender agrees to write off the deficiency(Difference between the short sale price and the loan remainder), GET IT IN WRITING. The agreement isn’t real unless it’s in writing…ever…ever.
Short sales represent a long cumbersome legal process. The best money you can spend would be to hire a real estate lawyer to handle the technical details of the process from start to finish. There’s a lot of back-and-forth banter about minutia in the short sale process. A lawyer will receive far fewer delays, holds, “we’ll get back to you.”’s and such from the bank. More bad news is, sometimes, the lender who agreed to the short sale will demand the seller to pay them back the deficiency, or the difference between the short sale price and the mortgage balance. Never mind that avoiding that was the reason for the short sale in the first place. They do it by classifying the deficiency as 1099 income on the part of the seller, like the seller was their independent contractor. That’s why someone who’s completed a short sale can be taxed on income they don’t owe, and what the Mortgage Debt Relief Act of 2007 was meant to fix until the end of this year.
The ultimate dirty trick is for the lender to pursue debt collection actions against the short seller. If it gets to the point that the short seller suffers wage garnishment, his only hope might just be to file for Chapter 7 bankruptcy protection. Never assume a debt is gone unless written confirmation is received, otherwise the seller may still be liable.
Remember, the best money you spend is on the lawyer who represents you and only you, not the bank, the buyer or any other party. Just You! He’s the one who guides you through the process, protects you from the lender and the buyer and the IRS and sets you free from the burden of a crushing underwater mortgage.
Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise! Contact me today for a market analysis of your house!
I service the following towns in South Shore MA: Whitman, Hanson, Brockton, Rockland, Abington, Pembroke, East Bridgewater, West Bridgewater, Easton, Weymouth, Braintree and Quincy MA.
Lew McConkey can get you the latest properties that are on the market
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