Windermere Real Estate/BI, Inc.
With my recent post on foreclosures, that leads me right into the topic of short sales -another buzz term that is dancing around this new real estate market we have all entered.
A short sale occurs when a home is sold, usually through the traditional “list it with an agent,” but, in a short sale, the amount the home sells for (after closing costs) does not cover the loan amount.
Let me give you an example of what is going on a lot around the island. Happy Family was moved out to the Seattle area in 2006 by the then prosperous Acme Company because the company was expanding their Seattle office. However, now, in 2009, Acme Company, now downsizing, is shutting their Seattle office and needs to move not-so Happy Family back to the East Coast.
Well, in 2006, Happy Family bought their home for $750K and put down 10%, which is $75K. Happy Family saw one year of appreciation until July of 2007, when their home went from $750K to $775K between 2006 and 2007. But, in the summer of 2007 the real estate brakes went on and the prices began to slide back down. So, today, let’s say their home’s market value is $700K. If Happy Family sells their home for $690K, after closing costs and taxes, they would net roughly $640K
So, let’s look at their situation – Happy Family owes $675K to their lender, so the difference is $35K. If they themselves can not bring that $35K “to the table” at closing, they can attempt to get approval from their lender to forgive that amount. So, basically, the bank is saying, ok, we will cut our loses and get most of our moeny back and only take a minor hit.
However, there are several issues to consider before deciding to do something like this. One is that the $35K the lender has forgiven has to be declared as income on your part and you will have to pay income taxes on it. Any lender who forgives debt is required to provide a Form 1099 information report to the borrower and to the IRS stating the amount of the forgiven debt. The Form 1099 will be required in any circumstance when a debt is forgiven, whether it is a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement that relieves the borrower of the obligation to pay some portion of a debt.
Note: The National Association of Realtors is trying to change the fact that homeowner have to pay taxes on this forgiven amount. NAR has identified sponsors for a new bill that would assure that any debt forgiven on disposition of a principal residence will not be taxed. They hope to move this forward in April.
Second, is that a short sale will negatively impact your credit and could stay on your credit record for 2-7 years, depending on your exact situation. So, if after your short sale, you are moving to a new town, for a new job, buying a home could be a challenge for several years.
Another point is that a short sale is not necessarily a foreclosure or even a pre-foreclosure for that matter. Many homeowners in a short sale situation have never missed a payment and are not in default in any way, their home value has just declined. They homeowner is just “upside down” as many people say and that is simply because their home is worth less than they paid for it.
And also, oftentimes, second or home equity lines of credit are in play here too, which just compounds the short sale situation, meaning the homeowner owes money to several banks, that they can not pay back due to their loss in equity.
The best advice I can give you is to consult a real estate attorney (usually for a $150 consultation fee) to find out how a short sale will affect your personal financial situation.
With foreclosure being such a buzz word, this is a good time to clarify some important definitions and the foreclosure process.
Pre-foreclosure. Pre-foreclosure means you have missed payments on your mortgage, and by definition are in default. For example, a borrower could be $9,000 behind in payments. During this time, borrowers usually work out an agreement with their lender to remedy that default and avoid the foreclosure process. Being in pre-foreclosure, does not mean you have entered the official foreclosure process until you have received a Notice of Default.
Notice of Default. Usually after a borrower has missed two payments, an official Notice of Default is sent to the borrower and the foreclosure process starts ticking. In Washington, the foreclosure process is approximately a 135 day process.
Notice of Trustee Sale. About 30 days later, the borrower enters the next step, when the Notice of Trustee Sale is posted and mailed. The notice will be sent to the borrower and posted in the same manner as Notice of Default letter, but will also be recorded with the county auditor. The notice will include info about the time and location of the sale. Thirty days before the sale is to take place, information on the sale is posted in an approved local newspaper for legal notices.
Borrowers then, generally have about two months until the public sale to make good on their default or work out a plan with their lender.
The sale or auction. Foreclosure sales must take place between 9AM and 4PM on a Friday, unless the Friday is a legal holiday, then the sale will occur the following Monday. Sales must occur within 190 days after the date of first default but may be extended up to 120 days at the trustee’s discretion. In the event of a bankruptcy, a sale may be reinstated no more than 45 days from the dismissal of the bankruptcy or lifting of the automatic stay.
Note: In Washington, the lenders can also go to court in what is known as a judicial foreclosure proceeding where the court must issue a final judgment of foreclosure. If the deed of trust does not contain the power of sale language, the lender must seek judicial foreclosure. The property is then sold as part of a publicly noticed sale. A complaint is filed in court along with what is known a lis pendens. A lis pendens is a recorded document that provides public notice that the property is being foreclosed upon.
For more information on avoiding a foreclosure visit the HUD website. However, please be aware that every state has different foreclosure laws, so also visit the Washington State Department of Financial Institution
This entry is for educational purposes only. If you are facing a foreclosure situation contact a real estate attorney or take advantage of resources on the above websites.
A little more breathing room for buyers.
Last year I had buyers scrambling to close before December 31st 2008, to take advantage of the $475K FHA loan limit about to expire in Kitsap County. It did expire, but as of February 26th 2009, the President’s Economic Recovery Package has lifted the lid on the limits once again (on January 1st of 2009, it went back down to $307K – a very low limit for those trying to buy a home on Bainbridge).
This is huge for our island, because here, in Kitsap County, we still have to contend with the conforming loan limit, which is stuck at $417K. So, the FHA, has become a popular product here on the island. If you’ve been looking for a house in the $400-600K range on the island, you know that in that range, having an extra $50K to spend on a house can make a huge difference in the quality of what you ultimately buy.
In the Bremerton-Kitsap County area, the FHA limit a one-unit house is $475,000; on a two-unit house is $608,100; on a three-unit house is $735,050; and on a four-unit house is $913,450.
The change in loan limits are applicable to all FHA-insured mortgage loans endorsed after HUD published the increased loan limits on February 26, 2009 and it lasts until December 31, 2009.
For more info on FHA loans or other loan programs like the USDA Rural Loan Program, send me an e-mail.
Charm & modern finishes intersect in this better-than-new home in one Bainbridge Island’s most preferred neighborhoods. Neighborhood trails lead to schools, shopping, library, and pool. Quality finishes include granite counters, stainless appliances, hardwood floors & crown moulding. The smart floorplan boasts vaulted ceilings, large rooms & a spacious eat-in kitchen. With professional landscaping, a tree fort in the large backyard, & proximity to downtown, this is the complete package. For more info or a showing call me at 206.718.4337. More photos are on my website at www.jenniferpells.com.