In Florida, Homeowners Deciding Between Short Sale vs Foreclosure and When to Buy a Home Again – Things to Consider
Posted By Larry Tolchinsky on October 2, 2012
Short sales in Florida are a bittersweet option for the Florida home owner in trouble on their mortgage, because by definition the “short” of the sale means the sales price does not cover the amount left on the mortgage and there will be a balance left due and owing by the home owner who sold the home in a short sale. The seller will come up “short” in paying off that mortgage from the sales proceeds.
That amount is also called the “deficiency” and while some states in this country do not allow lenders to sue and collect that amount from the borrower, Florida is not among them. Florida is a “recourse” state: the bank has recourse against the borrower under Florida law to collect the deficiency amount, i.e., the amount that the borrower came up short. The bank can still try and collect that sum unless they make a deal with the borrower otherwise, or unless the lender waits too long to sue to collect the deficiency and is time-barred by law.
Deficiencies exist in foreclosures, too, of course. A consideration in choosing to short sale or allow a full foreclosure is whether or not the deficiency amount will be impacted greatly by one of the other options. Will you lower the potential deficiency in a short sale? That’s a benefit to consider.
Freddie Mac and Fannie Mae Change Short Sale Process to Encourage Short Sales
Last month, the federal government announced that Fannie Mae and Freddie Mac would be instituting new short sale policies with the intention of boosting short sales around the country, effective November 1, 2012. (More on that in another post.) Bankers like the idea of encouraging short sales as an alternative to foreclosure: they believe that short sales are essential to moving the national economy forward and resolving the housing crisis.
Short Sales and Credit Scores
Another benefit to a short sale is how it impacts your credit record or FICA scores. According to one of the big three credit reporting agencies, Experian (read their site for details here), when you short sell your home, your credit report will not state “short sale.” If you have a foreclosure, however, “foreclosure” will appear on your credit history – for seven (7) years. Short sales usually show up as things like descriptions of settlement: “paid as agreed,” “paid as negotiated,” or “paid for less than the original amount.”
If you have a short sale, then part of the negotiations for the bank’s accepting the short sale will be how the bank reports the transaction to the credit reporting agencies. Banks, recognizing that there is an amount due on the home loan, will not report the entire mortgage as paid off – it has not been paid in full – and whatever they end up reporting to the credit companies, it’s going to have a negative impact upon your credit record.
However, different things may mean different dings: if the lender reports the loan as “settled” then it’s negative – but in this economy, future lenders will understand this report with more optimism than if the lender reports “deed in lieu of foreclosure” — or if the bank reports it as a “strategic default.” For Experian, a “strategic default” gets the same seven (7) year reporting life as a foreclosure does.
Larry Tolchinsky’s Tip:
In Florida, there are many home owners who are paying a mortgage payment on a house whose value is far lower than the amount left on the note. They are pondering whether or not they are wise to keep investing in that underwater mortgage. Others are in financial situations where for a variety of reasons, they have fewer options: these home owners are dealing with a Florida economy where it has come down to how they will leave their home, not if they will. For these people, deciding whether or not to short sale their home or allow it to go through the formal Florida foreclosure process comes with certain considerations.
For instance, some of these Florida home owners will hurt themselves and their families if they opt to go the foreclosure route and not try to short sale their home.
One big red flag here: if Congress doesn’t do something soon, then short sale advantages may disappear like a puff of smoke. At year end, on December 31, 2011, the tax benefit will cease by its own terms in the law unless a new law is passed — this tax benefit states that cancelled debt mortgage deficiencies are not to be treated as “income” by the IRS. For more details, read our earlier post and its linkage.
Now is the time to short sale your Florida home if you intend upon doing so, assuming that Congress does not extend this tax benefit passed year’s end. By doing so successfully, not only are you escaping that tax hit in 2013, but you are moving yourself into a better position to buy a home in around half the time that a full foreclosure would cost you in the number of years before you can get another mortgage.
Do you have questions or comments? Then please feel free to Chat with Larry in the comments below, at email@example.com, or (954) 458-8655. If you have a specific situation, please call or email Larry because he can’t answer specific fact questions in general comments. He’s happy to take your call.