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Short Sale 101 Videos

Friday, October 1st, 2010

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Arizona Anti-Deficiency Statute

Tuesday, June 8th, 2010

Arizona’s mortgage deficiency statutes located at A.R.S. §33-729, §33- 814 and §12-1566 and the case law interpreting them are complex. This article includes a checklist of items to be considered to determine whether a mortgage lender has the right to obtain a mortgage deficiency judgment against a borrower or guarantor of a loan secured by real property pursuant to…

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Mortgage Debt Relief Act

Thursday, June 3rd, 2010

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value…

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Three Things Homeowners Need to Know About Short Sales in Arizona

Wednesday, June 2nd, 2010

Fannie defines ALL Preforeclosure events as any one of the following:

  • Deed-in-Lieu
  • Pre-foreclosure Sale
  • Short Sale

Full Foreclosure retains a 5 yr waiting period
Note: New Waiting Periods Effective July 1, 2010

Preforeclosure Event Current Waiting Period Requirements
New Waiting Period Requirements

 

  • Deed-in-Lieu of Foreclosure – 4 years
  • Additional requirements apply after 4 years up to 7 years
  • 2 years – 80% maximum LTV ratios
  • 4 years – 90% maximum LTV ratios
  • 7 years – Standard LTV ratios
  • Preforeclosure Sale 2 years
  • Short Sale No specific policy currently exists
  • For extenuating circumstances, for all 3 event scenarios, it’s a 2-year waiting time and 90% LTV.

FHA is Different

Many people have recently asked what is the FHA waiting period after bankruptcy, foreclosure or a short sale. In answer, here are the FHA guidelines related to bankruptcy, foreclosure and short sales.

Chapter 7 Bankruptcy

FHA requires that the minimum waiting time is typically no less than two years from the discharge date. In addition, the borrower must have reestablished good credit or chosen to not incur new credit obligations.

Chapter 13 Bankruptcy

FHA states that a Chapter 13 does not disqualify a borrower from obtaining FHA financing as long as the borrower can show that at least one year of the pay-out period has elapsed under the plan and that all of the required payments (and mortgage payments when applicable) have been made on time. Also, the borrower must receive permission from the court to enter into the mortgage transaction.

Foreclosure

FHA states that the minimum waiting period is three years for a borrower whose house has been foreclosed or who has given a deed-in-lieu of foreclosure. It has been asked, How does FHA determine the date of the foreclosure? Sheriff’s sale? redemption? paid claim date (if past foreclosure was FHA)?

If the previous foreclosure was not a FHA-insured mortgage, the three year period will typically begin on the date of the sheriff / trustee sale. If the previous foreclosure was a FHA-insured mortgage, it will be reported on HUD’s Credit Alert Interactive Voice Response System (CAIVRS). CAIVRS is a Federal government-wide repository of information on those individuals with delinquent or defaulted Federal debt and on those for whom a payment of an insurance claim has occurred. In these cases, because the default is on federal debt most investors will not allow another FHA, VA, or USDA loan.

Preforeclosure Sale (Short Sale)

FHA does not currently have a policy regarding the time required to reestablish credit and obtain a new FHA loan after a short sale. However, the borrower must be able to qualify using standard FHA guidelines including the fact that they typically can not have any late payments on their mortgage for the previous 12 months. Although this is the official FHA policy, many lenders have heard that FHA currently will not insure a new loan application from a borrower with a short sale that is less than three years old.  Many of the individual banks and lenders have implemented their own policies regarding the waiting period after a short sale. I have seen a typical range between two and four years.  We anticipate that FHA will issue a written policy regarding short sales with more liberal guidelines in the near future.

If in a case of relocation and there was a short sale for the previous residence and there are not any lates on the credit report, FHA will allow a new loan without a waiting period. The key is relocation (although it has not been defined what the minimum distance might be. How the previous lender reports the short sale/mortgage to the credit bureau may determine the approval.

New Seasoning Requirements To Obtain Traditional Mortgage Financing Following a Short Sale or Deed-in-Lieu

Tuesday, June 1st, 2010

The Arizona Association of Realtors form of Short Sale Addendum to the Residential Resale Real Estate Purchase Contract contains the following disclaimer: “Seller acknowledges that Broker is not qualified to provide financial, legal, or tax advice regarding a short sale transaction. Therefore, the Seller is advised to obtain professional tax advice and consult with independent legal counsel immediately regarding the tax implications and the advisability of entering into a short sale agreement.”

Sellers should not dismiss this cautionary statement. Short sales involve potential consequences that sellers might not expect. Here are a few key reasons why sellers should seek tax and legal advice so they can enter a short sale armed with good information.

Your lender may be able to sue you after the short sale A short sale occurs when a lender permits a homeowner to voluntarily sell their home even though the lender receives less from the proceeds of the sale than the outstanding balance on the loan. Unless the lender gives the homeowner a written release of liability, the lender could sue the homeowner for the unpaid balance of the loan (also called the deficiency). Some lenders even include in their short sale approval agreement an express provision reserving the right to sue the homeowner or require the homeowner to sign a promissory note for the deficiency.

In contrast, the anti-deficiency provisions contained in Arizona’s foreclosure statutes protects many (but not all) homeowners from liability to the lender after a foreclosure or trustee’s sale. A desperate homeowner might be grateful to learn the bank approved a short sale and rush to sign the bank’s approval agreement only to later face a lawsuit from the lender for a substantial liability. If anyone wonders whether banks would really pursue borrowers for deficiencies, they should consider lenders’ recent and ongoing efforts at the Arizona legislature to severely reduce the scope of the anti-deficiency statutes.

You could owe taxes as a result of the short sale Even though the seller receives no cash at closing in a short sale, the seller might owe taxes on the short sale. There are two possible types of taxes from a short sale – taxable cancellation of debt income (or COD income) and a taxable gain from the sale of the house.
Generally, if a lender cancels a debt, the cancelled debt will be COD income unless the borrower qualifies for an exclusion. Exclusions include qualified principal residence indebtedness and insolvency. Cancellation of a non-recourse debt (meaning a loan for which the lender’s only remedy the borrower’s default is to foreclose) does not result in COD income, but there can still be a taxable gain.

As strange as it may sound, a seller can have a taxable gain on a short sale. The gain or loss on sale of a property equals the difference between the seller’s adjusted basis in the property and the amount realized. In the case of a non-recourse loan, the entire unpaid debt immediately before the sale constitutes the amount realized for tax purposes.

Attempting a short sale does not stop a foreclosure Short sales are an alternative to foreclosure, but pursuing a short sale does not prevent a foreclosure. The short sale is a voluntary agreement between the homeowner and the lender. The lender doesn’t have to cancel a foreclosure until it approves the short sale (which can take months). If the seller can continue to make payments, this won’t be an issue. Otherwise, the clock will be ticking.

Short Selling Your House: Do You Need A Lawyer?

Monday, May 31st, 2010

One of the more common questions that people have asked me over the last year or two is “do you think I need a lawyer?” The question almost invariably arises when someone is considering a loan modification, short sale or foreclosure as something that will be in their future. And as usual, my answer mostly has been – It depends. More than anything else — in my opinion — whether or not you choose to hire a lawyer to provide legal advice primarily depends on the following:

  • How much and what kind of potential deficiency risk you have?
  • What kind of estate planning and personal assets you have?
  • What kind of effort you are personally willing to put into getting to a resolution?

Each personal situation is different and each lender is different, so this is by no means a conclusive list – just a general guide to go by.

Potential Deficiency Risks According to Arizona laws, there are statutes that are commonly referred to as “anti-deficiency statutes” and they are the legal definition of what a lender can or cannot do should a mortgage debt go delinquent or be settled for less than owed. And as with any other part of the law, there are quite a few different situations that could have very different risks. So if you are unaware of what kinds of potential deficiency risks your particular situation entails…You may want to hire a lawyer. Estate Planning and Personal Assets Do you have an estate plan? Is your home held in a trust, a family partnership, an LLC? Is the property an investment property? While these things usually don’t spell out specific additional risks or problems – they are simply an indicator of complexity. And the more complexity to your particular situation, the bigger the chance of something not going as expected.

They are also an indication of personal wealth. And in the event of something going not as expected and should something happen such as a bank suddenly suing you for the difference between what you sold your house for and what was owed on the note – I have found that lawyers rarely sue people who do not have deep pockets.

So if you have an estate plan or have significant assets…
You may want to hire a lawyer. Time: The Personal Investment If you find yourself considering a loan modification, short sale or foreclosure – one thing is certain: it will take a large amount of your time over a prolonged period.

If you find yourself in the situation where you want to trade money for time…
You might want to hire a lawyer. Now. Having written before about loan modification lawyers, loan modification companies and whatever-else I have said — here is what I personally did when I found myself in the situation where it was time for me to end up with some kind of loan modification/short sale/foreclosure resolution… I hired a lawyer. Because I learned long ago… There is nothing more expensive than cheap legal advice.