Neither foreclosure nor deed in lieu of foreclosure are listed as “settled” on your credit report.A deed in lieu of foreclosure is stamped and reported on your credit report as a foreclosure. It is unclear as to whether the deed in lieu of foreclosure is looked upon any more favorably on your credit report than a foreclosure by future lenders although currently most credit reporting services and lenders consider it identical to a foreclosure. It is certainly less expensive for the lender to do than a foreclosure but does not release the homeowner of any secondary debts or tax liability so the benefits to the homeowner are questionable. Beware if you do have a second equity line. If the house is sold for a very low price at auction or placed back on the market by the lender as an REO, then the deficiency judgment against you can be huge, usually the deficiency is greater when a house is sold as an REO or auction than as a short sale.
ABSOLUTELY NOT TRUE!!! The same possible tax consequences exist even if you let them foreclose or do a deed in lieu of foreclosure, all that matters to Uncle Sam and IRS is whether or not the amount of the unpaid debt qualifies for relief under the IRS guidelines. According to the IRS section 61(a)(12), lenders are required to report the unpaid debt amount on a form 1099-c to the IRS. You would need to discuss with your tax professional whether in your particular financial situation you qualify for tax forgiveness guidelines from the IRS. Many people do in fact qualify for debt tax forgiveness under the “Mortgage Forgiveness Act of 2007 & 2008.” The mortgage debt forgiveness act has been extended through December 31 2013 so that most homeowners will not have to take the penalty of paying a tax on the amount of debt forgiven from a short sale or loan modification Often times debt tax can also be forgiven under the rules of insolvency, used often when the homeowner does not qualify under the acquisition money rule but when the homeowner’s liabilities exceed the fair market value of the home. Only a tax professional can give you advice on these matters and I strongly recommend that you talk with one since I am not an accountant and cannot give out tax advice, everyone’s situation is different and the information presented here is merely a very general guide but is in no way intended as accurate or to be used as personal tax advice. Meanwhile some good reading on the subject can be found at:
Not true, although that used to be the case at the beginning of the real estate crisis. Now the lenders usually base their decisions on comparing the current market value of the home to the price that it can be sold for as a short sale rather than by selling it at auction or as a “Real Estate Owned” property (REO). They take into account the many costs involved in foreclosing, holding onto the home and the costs avoided if they accept a reasonable purchase offer as a short sale. In general, the homes that are sold as short sales do fetch a slightly higher price than those sold as foreclosures and it costs the lenders a lot of money to foreclose on a home and maintain it once it is a vacant bank owned property.
No, that is not true. Many people in every social and financial status do qualify for short sales, even very wealthy people, but not everyone does. A realtor who is a short sale expert will do an evaluation to see if you qualify for a short sale. The major factor that qualifies a person for a short sale is “financial hardship,” meaning that it has become difficult for the homeowner to continue to pay the mortgage. Realize that a financial hardship does not mean that a person must be insolvent or destitute. It simply means that there is some logical reason for why the homeowner must sell their home. It could be a job transfer, a retirement, a need to move to a certain area for a climate change. a shortened commute time, closeness to a relative, closeness to a childcare, etc. It is simply a reason that makes sense to the lender for the reason that a home sale is necessary rather than just being “upside down” on the payments.
No, they are very separate from each other. I have completed very successful short sales for clients who were unable to work out a successful loan modification with their lender prior to listing their homes for sale. I often will tell distressed homeowners who contact me to first try to get a loan modification from the bank, I will help them with that process if they do prefer to keep their present home. Unfortunately for many of them the lender will only reduce the payments a very small amount or just as often raise the monthly payments but apply more towards equity, which usually is not very helpful for the homeowner who is already struggling with too high payments and a “bad loan” that cannot be refinanced because of lack of equity.
Absolutely not true! Many bankruptcy lawyers will ask the judge to allow the home to be sold as a short sale as part of the bankruptcy because they know that the homeowner still should try to avoid having a “foreclosure” placed on their credit history for up to 10 years. They also can often get the second equity line along with other liens dismissed in bankruptcy court. Most lenders actually have a bankruptcy department that I negotiate with regularly. There is a split of opinion among attorneys on whether it is best to do the bankruptcy before or after the short sale and there is some logic supporting each point of view. The answer to that question is very individual and should be discussed with your own bankruptcy attorney. However, it is agreed that the foreclosure on your credit record for many years can and should be avoided if possible and a short sale is a good, no cost to you way of doing so. I have many bankruptcy attorneys refer clients to me asking me to short sale the home as part of their bankruptcy procedure. I have also had bankruptcy attorneys refer clients to me so that they can avoid having to do a full bankruptcy because the short sale process can usually eliminate the debt that is associated with the homeowner’s second equity line, limiting the damage to the homeowner’s credit. Another strategy that some of the bankruptcy lawyers use is to have only the husband or wife file the bankruptcy which eliminates some of the debt and then the couple pay off the rest of the debt and have the second equity line forgiven as part of the short sale. It was explained to me that the benefit of that strategy is to leave one of the spouses with intact credit. However, that strategy is only beneficial to some people in certain specific situations and is not for everyone and it is best to speak with a good bankruptcy attorney. I work with some excellent bankruptcy attorneys who could advise a homeowner with these types of decisions and will be happy to refer you to one.