Tampa Palms, Westchase, Carrollwood and Tampa Bay Real Estate News From Jeanne Prigitano

So by now you know what a short sale is. Just in case you don’t …. a short sale is when you sell your home for less than what you currently owe in the way of a first mortgage and outstanding credit line or home equity loan. The bank(s) holding the mortgage and/or equity loan would need to approve the sale because they are accepting less than what is owed them.

There has been a great deal of discussion about short sales vs. foreclosures and the impact on your credit score. Recently, there has been an indication that whether one does a short sale or foreclosure the impact on your credit score is the same. Even if that proves to be true, should that be the only thing one considers when deciding what to do?

Here are some thoughts and questions you might want to consider.

1. Deficiency Judgment.

A deficiency is the difference between what the home sold for and what is owed. One very important thing to realize is that Florida is a recourse state. That means that Florida law allows lenders to place a judgment on the borrower for the difference.

With a foreclosure, a deficiency judgment is automatically awarded to the bank. Even if the bank subsequently sells the house, more than likely the deficiency will be greater than in a short sale because of additional court and attorney’s fees. And again, I reiterate that the deficiency judgment is automatic.

With a short sale, it is not always clear. The banks would need to go back to the courts to impose the judgment. So, when negotiating a short sale it is important to try to get the bank to waive their rights to a deficiency judgment and release you from further obligation.

The banks have up to 5 years to file for a deficiency judgment and up to 20 years to collect. What do you think that will do to your credit score? Wages can be garnished and assets can be attached. So although you believe you have walked away and moved on (see my post on Strategic Defaults), you can have this hanging over your head for 20 years.

To avoid the consequences of a deficiency judgment, many are now advocating bankruptcy. If you do not have any other significant assets, that may be an option. Once again, think about what that can do to your credit score.

2. Phantom Tax

If the deficiency is forgiven, the bank can issue a 1099 for the difference because it is considered income. I know that you are wondering how on earth a deficiency can be considered income. Well, if you are short $100,000 and don’t have to pay it back it is as if someone just gave you $100,000.

The Mortgage Debt Relief Act of 2007 protects borrowers from this phantom tax if it is the primary residence (homestead).

So if one decides to rent the home with the intent of selling it later, be mindful that a phantom tax may be applied.

Nevertheless, isn’t a phantom tax far less painful than a deficiency judgment? In the long run a deficiency judgment could cost you far more.

This blog post only touches the surface. Unfortunately, many of us may be faced with this choice if we need to sell a house. If you are faced with this decision, please contact an attorney for legal advice and an accountant for financial implications. Every situation is different. Don’t fall prey to anyone who has you file a quick claim deed or establishes a trust in their name. The implications would require another very lengthy discussion.

Fannie Mae has just launched a new website (http://www.knowyouroptions.com) that may help answer some of your questions.

If after doing all of the research, you decide that a short sale is your best option, please contact me. I have helped other families in the Tampa Bay area with the short sale of their home. Just make sure you have all the facts. Please pass this information to any family members or friends who may find it useful.