I hadn't looked into a short sale because I would rather cough up the 8 grand than take a hit to my credit, have my finances subject to intense scrutiny and be forced to liquidate our 401ks and explain why we still have cell phones and Netflix.

The bank WILL look at your finances and whether or not you have the ability to pay the difference between the sales price and the amount due on the mortgage before approving a short sale.

Perhaps this guy didn't have any savings to make up the difference.

I also seriously doubt that there are no credit consequences to a short sale. Maybe he had no tax consequences, but I can't believe that his credit won't take a hit.

I don't know the details but a guy at work who moved here a couple? of years ago convinced the bank to allow a short sale on the house he owned in Denver. Well now the bank is after him for money. Like I said, I don't know the details but something didn't go right or he didn't understand something correctly. He's not a dumb guy either.

Here's another thing to think about. Does anyone ever come into work and talk about how they got screwed on the new car they just bought? How much extra in points they had to pay on their new mortgage? No. If they can't brag they don't bring it up. You might not be getting the whole story.

You're right, I think he is just trying to brag. I don't believe the part about not hurting his credit. What a thing to brag about anyway.

There's a lot of erroneous & misleading info being tossed around these days about short sales. It seems to almost be taking on a life on its own. If there's not already there soon will be books on the NY Times Best Seller List on how to do a short sale. They'll be in direct competition with the How To Buy A Foreclosure books. :o)

The US Treasury/IRS have devised a "Means" test that lenders apply to each potential short sale situation. If you meet the criteria of this test then a lender 'may' do a short sale but there's no requirement. A short sale is usually reported to the credit agencies & remains on your record for 7 years (same as a foreclosure). There may be some negotiated restructures where this doesn't happen but they are exceptions & not the norm.

A short sale is done as an avenue of last resort. It's not designed to let people off the hook just because they're upside down on a mortgage. But, like BK, sometimes it's in everybody's best interests. (Sometimes, creditors force companies/individuals into BK...there are requirements that must be met in order for this to happen.)

Anyway, be wary of anybody that tells you a short sale will leave you smelling like a rose. It not as bad as an Amorphophallus but worse than an onion!

/tricia

"He said that "new legislation" is what made this possible. The only legislation I know of concerning this involves the taxation of the forgiven debt."

That might be what he's referring to - it wouldn't be possible for him to pay taxes on an extra $100k of taxable income, but it is possible for him to do with without that hit. As far as his credit not getting dinged, there may be a restructure of the $100k - maybe there will be a lien for $100k on his new house, for instance, or maybe he has a loan of some other sort.

Then again, he sounds like the type that would use his Economic Stimulus Check to file bankruptcy and then brag about how he walked away from $100k in debt and it didn't cost him penny! (I guess that's helping the economy, sort of...)

My cousin is also going through this right now. At first, he also made it sound too good to be true. He actually said it only affects your credit for 18 months. Right now, they have the house for sale and the mortgage company must approve any offers. Then they will find out if their debt is forgiven or if they will restructure the remaining debt into some kind of loan. They already bought another house so the short sale house is not considered "primary" and will be subject to capital gains taxes.

I have a friend who is going through a mortgage issue right now. She foolishly bought her new home with a bridge loan without really reading the fine print---and it was at the top of the local market. Subsequently, her old home languished on the market as she chased the prices down and ended up with it not selling for the amount of the loan. Because the two loans were now one, and the home she bought wasn't worth what she paid for it, and the "freeze" period of the interest only was now over, her house note more than doubled, while she was more upside down than ever. In the meantime, her husband has had some job issues, and is now considered self employed. No one will touch them for any type of refinance at all. So, now she is trying to gather information about her various options. A real estate agent recommended she list the home for sale, and at the end of a 90 day marketing period, her lender would accept a "deed in lieu of trust?" if a short sale doesn't occur, while a "credit counselor" advised her to just let the mortgage company forclose. A bankruptcy lawyer advised her to file bankruptcy. So, it seems as though everyone is tailoring their advice to their prejudices. I don't know what to advise her to do if the experts can't agree. Does anyone here have any wisdom to pass along about the consequences of the various choices? I'm sure that she isn't getting the complete picture, and for sure the tax consequences of each choice. Any further clarification of the differences between the choices would be great.

"They already bought another house so the short sale house is not considered "primary" and will be subject to capital gains taxes."

I'm no tax attorney, but I believe your cousin is screwed - the forgiven debt will be taxed as regular income because the exemption congress wrote in for 2007 and 2008 works only on a primary house. I'm not sure what you're referring to about capital gains taxes but if there's forgiven debt on a second house its still treated as normal income.

Maybe there's some way to document that they lived in only one house at a time and the other wasn't ever used as a vacation home or rental? I don't know if that will help but it might be worth checking out.

mfbenson - you are probably right - regular income, not capitol gains. Regardless, they will be on a payment plan of some kind.

The actually did rent out the house for several years and are not "homesteaded" on it so it will not qualify as a primary residence.

Paying the taxes would be better than having to pay the loss on the home though.

The RE lady who is on MSNBC sometimes (I can't remember her name, but she's very cute and looks like a pixie) was discussing short sales on the Today Show a few weeks back. She said it affects your credit same as a bankruptcy.

Think about it, if that guy got into trouble overextended on a mortgage, what are the chances he really has a clue about how credit and taxes function?

One of my DH's coworkers was offered a job elsewhere and had to sell a house he had paid too much for. He talked about doing a short sale like it was no big deal- really blew me away.

I found an interesting article on Short Sales -- excerpted here:

"Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 380.

Short Sale
The effect of a short sale on a seller's credit report is identical to that of a foreclosure. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 200 to 300 points. This means a short sale with a previous FICO of 720 will see it fall from 520 to 420.

Catherine Coy, a mortgage broker in southern California, agrees. "The effect on a consumer's credit report -- foreclosure vs. short sale -- is the difference between being hit by a train or a bus," says Coy."

Here is a link that might be useful: Short sales versus foreclosure

As mentioned above, this might be an option:
Foreclosure may be avoided by giving up property deed

JIM FLYNN
Columnist

Last week, I told you about short sales a sale of property by a distressed borrower where the lender agrees to release its lien for less than what it is owed. Lenders will occasionally agree to this on the theory that this is as good as itÂs going to get. ThatÂs because foreclosing against the property will add cost and delay, and wonÂt increase the amount of money the lender will ultimately receive from its collateral. Sometimes, lenders will not only agree to a short sale, theyÂll also agree to forgive the remaining balance on the loan. But sellers canÂt count on that.

Another strategy that often comes into play when a borrower gets in trouble on a loan is called a "deed in lieu of foreclosure." Here, the borrower agrees to turn ownership of the property over to the lender by signing a deed. This again saves the lender the cost and delay associated with a foreclosure and will usually include a promise on the part of the borrower to leave the property in good condition  something that doesnÂt always occur when the lender takes the property back in foreclosure and evicts the borrower.

In a deed in lieu of foreclosure transaction, a borrower has good odds of negotiating an arrangement whereby the lender will agree to consider the loan paid in full in exchange for immediate ownership of the property.

Borrower to lender: "Hello lender? Borrower here. Listen, IÂll give you a deed to my property if you agree to cancel the promissory note I signed. What do you say?"
Lender to borrower: "Why should I do that?"
Borrower to lender: "Because otherwise itÂs going to take you six months to get the property back and cost you $5,000 in legal fees, and I may not leave the property in the best condition when I pack up and go. Plus, after you evict me, IÂll file bankruptcy."
Lender to borrower: "Oh."

If a deed in lieu of foreclosure is to occur, the parties need to enter into a written agreement that explains whatÂs going on  specifically, that the borrowerÂs debt is being satisfied by a voluntary transfer of the property. This agreement will also contain language that the lenderÂs title insurance company will insist on stating that the borrower really knows what heÂs doing and has agreed to give up legal rights built into the foreclosure process  notably, the right to cure the default and stop the foreclosure during a several month period while the foreclosure is moving from initial filing to sale.

Keep in mind that a deed in lieu of foreclosure transaction wonÂt work if there are other liens on the property. ThatÂs because if the senior lender gets a deed to the property from its borrower, the title will be subject to those other liens and the lender is going to have to foreclosure in any event to get rid of them. Thus, a deed from the borrower wonÂt accomplish the goal of saving cost and delay associated with a foreclosure.

Like short sales, deed in lieu of foreclosure transactions come with considerable legal baggage and borrowers are best advised to see a lawyer before moving in this direction.

Jim Flynn is a local attorney. Contact him c/o The
Gazette, P.O. Box 1779, Colorado Springs 80901; fax
578-8836 or e-mail jtflynn325@hotmail.com. Not all
questions can be answered.

Short Sale
The effect of a short sale on a seller's credit report is identical to that of a foreclosure.

Then why bother -- why not just foreclose??