Orlando Real Estate News Blog

• Will I owe the bank money after the short sale is accepted?
• If you are able to negotiate a price and buy it for less then I owe, will the bank come after me for the difference?

  When the lender or bank accepts a short sale on the property for less than what was owed, then a deficiency exists with the loan. The deficiency is the difference between what the homeowner owed and the amount the property sold for.

 For example, Mr. Jones owes $300,000 on her home and the lender accepts a short sale for $200,000. There is a deficiency of $100,000 for which the lender can then sue the homeowner. The key phrase is "can sue." That is the right of the lender. However, that is a practice that almost never happens but, it is a real concern for the homeowner. In most cases, the homeowner wants nothing else to do with the lender once the property is sold.

 If the deficiency judgment is granted, it would appear on the homeowners' credit report just as any other judgment would appear.

Will they be required to pay the difference? During the short sale process, we will negotiate with the lender to not seek a deficiency judgment against the homeowner.

 Some lenders as a matter of policy, will not seek a judgment against the homeowner because they feel they have waived their right by accepting a short sale however, if you can get them to openly acknowledge they will not seek a judgment; the owner will be more than happy.

 There is a second issue as it relates to the deficiency and that is the 1099.

 The lender will issue a 1099 to the homeowner for the difference. In Mr. Jones case, the lender will issue him a 1099 for $100,000. This will have to be reported as income Mr. Jones had received and thus he will have to pay taxes on the $100,000 as though it was earned income.

Upon successfully closing a short sale, lenders will always report a loss to the IRS and issue a 1099. However, the Mortgage Forgiveness Act of 2007 was signed into law on 12-20-07 and is now official, effectively getting rid of the question "will I be taxed on the Short Sale". Prior to this action, forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure, was potentially taxable income to the borrower. This was the subject of much media attention and led to many questions and concerns from Sellers wondering whether or not they were going to get "hit with taxes" on the Short Sale. The new law, however, temporarily waives these taxes for debts forgiven (as high as35%) from the beginning of 2007 to the end of 2009.

This will effectively put an end to the question from Sellers... will I be taxed on the Short Sale discount. The definitive answer (at least until the end of 2009) is NO! For a copy of the Mortgage Forgiveness Debt Relief Act of 2007, go to: http://www.govtrack.us/congress/bill.xpd?bill=h110-3648 or http://www.whitehouse.gov/news/releases/2007/12/20071220-6.htmlThe bottom line here is that only Acquisition funding can be forgiven by the Mortgage Forgiveness Debt Relief Act of 2007.Foreclosure, Deed in Lieu and Short Sales are all treated the same in regards to taxes. Any cancellation of debt is a taxable event except for any acquisition funding for your primary residence that you've lived in for the last 2 years. Everything else is taxable. However, please see you tax advisor if you have a second home or investment property that you are considering a short sale on. You accountant may advise you that you may have a loss on this investment property that would offset any gain. Please seek advise from your tax advisor.

In my dealing with lenders, we have found that they generally will not seek a deficiency judgment because of the hardship. There are a couple of options that the homeowner has as it relates to the deficiency judgment. In Mr. Jone's case, he could file bankruptcy to address the judgment. Mr. Jones could also short sale the deficiency with the lender at a later date. In other words, offer the lender a lesser amount as "payment in full."

 Here is an important note. The lender, if they issue a 1099 cannot then sue for a deficiency judgment. The lender can only pursue one or the other. In other words, Mary can't receive both a deficiency judgment and 1099 from the lender.

 It is obviously in the best interest of the homeowner to be proactive and deal with the short sale before it becomes a foreclosure. At least there is a chance that we can negotiate away the deficiency before it even becomes an issue.

About the author: 

Jerry LaRose is an Orlando Area Residential Real Estate Expert, who can assist you with the purchase and/or sale of real estate in Orlando, Windermere, Winter Garden Florida or any place in the country. Jerry has created a team of professionals throughout Orlando and the country to ensure that you enjoy a smooth transition to your new area. Please visit www.JerrySellsOrlando.com for your real estate needs.  Please give me a call if you have questions about the Orlando and Central Florida real estate market.

 Jerry LaRose, P.A., ABR, GRI, e-PRO, CLHMS, REALTOR® 407-580-7011

When you are preparing for a major purchase make sure you check your credit scores and credit reports from all three credit reporting agencies: TransUnion, Equifax and Experian. Looking at your scores and reports a few months before your loan application will help you get a complete picture of your credit health. Worried if your credit score makes the grade? If your credit score is above 700 you will probably qualify for a prefferedloan. Under 650, you may have trouble receiving new credit.

• Payment history - A good record of on-time payments will help your credit.
  
• Outstanding debt - High balances in relation to your credit limits can harm your credit. Aim for balances under 35%.
  
• Credit account history - An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.
  
• Recent inquiries - When a lender or business checks your credit, it causes a hard inquiry and a slight ding to your credit score. Apply for new credit in moderation.
  
• Types of credit - A healthy credit profile has a balanced mix of credit accounts and loans.

If your credit score is a little low, pay your bills on time, reduce your debt, remove inaccuracies and avoid new inquiries for a few months. Plus, don't forget that your credit score is not the only factor a lender may look at when they are evaluating your financial standing.

Jerry LaRose is an Orlando Area Residential Real Estate Expert, who can assist you with the purchase and/or sale of real estate in Orlando, Windermere, Winter Garden Florida or any place in the country. Jerry has created a team of professionals throughout Orlando and the country to ensure that you enjoy a smooth transition to your new area. Please visit www.JerrySellsOrlando.com for your real estate needs.  Please give me a call if you have questions about the Orlando and Central Florida real estate market.

 Jerry LaRose, P.A., ABR, GRI, e-PRO, CLHMS, REALTOR® 407-580-7011