To Short Sale or Not To Short Sale That Is The Question?

Question

I realize there is no sure fire way to guarantee a lender will agree to a short sale and in a lot of cases it seems to come down to "the bottom line", will it be it more profitable; or should I say less costly; than a foreclosure. There are variables I just don't know and I'm not sure anyone can know all of them, but we can make an educated assessment of the overall likelihood they will agree to a short sale. This is what I'm trying to determine; if I move forward will they say "yes"?

Looking for feedback; lots of feedback! (Questions at the end of Post)

Overview:

- Hardship is difficult to explain but both financial and health related (This is my biggest concern)

- I have basically been "robbing Peter to pay Paul" for  many years to stay current on my mortgage payment. I can't do it anymore, something has to change. I have been shifting the liability for one location to another.  (Credit cards, - savings, 401k loans) etc...

- Even with both units rented I am paying out monthly

- I am current with my payments but considering stopping I am out of money!

The Numbers:

- Loans total: 310,000$ (80/20 loans)

- House value: 220,000$ (educated guess, not official comp)

- Property (Mortgage, Tax, Insurance) % of Gross Income: 30.72%

- Property (M,T,I + Property Expenses) % of Gross Income: 34.70%

- Property (M,T,I,E + Living Expenses) % of Gross Income: 54.45%

Cash Flow:

- Rental Property: monthly expenses: $2,706.86

- Living monthly expenses: $1540.85

- Expense Total: $4247.71

- Monthly Income (including rent): $4,717.50

- Remaining: $469.79 (monthly remaining cash)

Additional Numbers if it matters

Investment to date: $26,000

Future Investment: (Work next 10 years): $74,000

Questions:

Debt Relief

- Was "The Mortgage Forgiveness Debt Relief Act and Debt Cancellation" extended to 2014?

- I do not live in this property will this void the "principal residence" requirement for the forgiveness?

Credit Score

- I'm reading a short sale hit to your credit is equal to a foreclosure is that accurate?

Deficiency

- Likelihood the lender will agree NOT to pursue any further payment by the homeowner. The difference between balance owed and short sale price?

- Does Massachusetts ban deficiency judgments on Short Sales or Foreclosures, or both?

General:

- Any chance I can try and stay current (keep making payments) and still get a Short Sale approval?

Final Thoughts:

I have been living with this mistake for 10 years, I have tried numerous methods to turn it and, I don't qualify for HARP or HAMP, additional subdivision, turn attic into a studio, add a bedroom to the current 2 bedroom, both will be costly and no guarantee the town will allow it.

The projected future investment needed to update this place is crazy high, I haven't figured future rental increase or appreciation to find a breakeven point yet, but I think it's obvious it is way out there in years, and this place is starting to take a physical and mental toll on me. It is not my nature to give up on something; I was not raised that way so even with all the stress and financial destruction I am having a hard time deciding to move forward with it.

Thanks in advance for your input.

Shaun Reilly · Answer

Frank my brokerage specializes in listing short sales and there is an affiliated negotiation company that has like a 95% acceptance rate.

I'm like the only agent in the office that doesn't have that as their main listing source.

If you want you can PM me and I can get you in touch with someone.  If nothing else they will talk to you about your specific situation and give you some advice and tell you about any of the local nuances.

(Moderators:  I'm not soliciting a listing.  Wouldn't take it even if offered, I hate doing those!  Just offering to set him up with someone that can help)

Frank Fiore Jr · Answer

@Ann Bellamy Ron S.

Ann, I believe the people I'm working with and Sean's friends are one in the same; they have been great through all this but I'm down to the wire and this decision is beyond them at this point.

Basically I'm deciding between

1. Keeping the house (#'s I outlined above or in previous post in more details)

300k mortgage, 210k value, 600$ out of pocket a month after rent collection even with 3% rent increase over the next 2 years and a 10% increase in value I'm still in a big hole; and I project 30 - 50k in repairs over the next 5 - 10 years.

2. Going ahead with the short sale

Paying 10K at closing, owing 21k in taxes (based on this years income + the deficiency (the deficiency amount bumps me to a new tax bracket to top it all off)

Hoping the MDRA get passed again this year (in which case I'll will be forgiven on the tax burden)

Hoping I can recover my credit score in a relatively short time frame; which is important to me but not the end all be all; there are other ways to finance deals as you both know.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Appreciate the feedback... I should have provided a bit more info....

I am in the thick of it.

My tax liability if I accept the offer currently in play is 21K, 17k federal and 4k State

I am bring 10K to the table for this deal

They are including a wavier on the deficiency but that does not help me in the Tax area

The MDRA was extended in 12/2014 for that year only; so unless they extend it in 2015 I will have to pay the additional 21K in taxes.

I ran the #'s on being insolvent and it doesn't work

I am current on my payments haven't missed or have a late payment.

Wayne Brooks · Answer

@Frank F. "must make payments thru the end of the year to stay within the 90% BS".  What 90% BS?

Ron S. Handles Freddie loss mitigation, I believe.  Freddie and Fannie are similar/identical in rules, procedures etc.  He can answer your questions, being from the dark side.

Frank Fiore Jr · Answer

Ron S.

what do you expect the impact to my credit score to be? currently 816.

What is the average turn around time; for a active attempt to recover my score. 1 year, 2 years, 3 years. When do you think I could turn that hit around and get back to my current score?

What time line do you think it would be before I could purchase another property

Wayne Brooks · Answer

@Steven Hamilton II

Does MDRA apply if you moved out of your primary 2 years ago, and have been renting it?

Frank Fiore Jr · Answer

@Vincent Grant, thank you for your feedback, it does help!

Currently this is my only property; so after this short sale I'm circling the wagon and starting over!

I have been learning so much over the last 2 / 3 years; I realize what my mistakes where and feel so much more confident. I am working on a business plan and although I see buy and hold as part of my long term strategy it is not what I want to jump into right away.

Appreciate the input and I will look into the lending requirements.

I am moving forward with the short sale... I have been over the #'s to many times already; and if I hold this property it all but kills my chances of getting another loan for a buy and hold for a long while. And although its difficult for me to let go; I am getting better at it, and I am learning to embrace the need for physical & mental well being as a higher priority.

Physical and Mental well being has been my primary focus for 2015 and its going well.

I will find a way to overcome the limitations to financing; there will always be great deals out there, and depending on how you view the market and our economic health; there will be another major buying opportunity showing up before you know it.... Of course that's just my opinion....

This isn't philosophical by any means but positioning yourself to buy at the bottom is building equity....

The big risk for me in this short sale is the tax implications; with the MDRA not being extended yet in 2015 I may owe a nice chunk of change.... I'm hoping they decide to pass it but I'm not counting on it.

Vincent Grant · Answer

Frank, I recently found myself in the same situation. I held on to a rental that was worth less  (60% less) than what I purchased it for. I held on to the property for 10 years and finally short sold it.

My credit score dropped approximately 80 points but recovered in 11 months. Major draw back to doing the short sale was that I can not purchase or refinance any property for 2 - 7 years. FHA, VA and conventional lending guidelines vary. I suggest you google the guidelines to get a gauge on where you stand in regards to being able to make new acquisitions or refinance.

I look back now and wish I had held onto the property because now I find myself in a situation where I am missing out on some good deals because I am not eligible to qualify for FHA, VA or conventional lending (I like to buy and hold).

I may not have been much help so I will end by saying this. Your health and sanity are more important than your credit score.

Ann Bellamy · Answer

Frank, suggest you take @Shaun Reilly up on his offer, the company he is talking about is really good.  They'll have a bunch of answers, too.

Ron S. · Answer

If I could tell you the hit you would take with any degree of certainty, it would be like having the recipe to Coca Cola. They (Fair Isaac) do not publish the logic behind their algorythms so, it's anyone's guess as to how big the hit is. There are many factors in the logic and a short sale or foreclosure is only one of the multiple data elements. I will say it would be significant though. The general makeup of a FICO score is:

* Payment History (35% of the score is developed from this metric)

* Debt Burden (Not just a debt ratio but, six different metics in the debt category!)

* Lenght of credit History

* Type of credit

* Inquiries

* public records

* credit opened recently

I'm not in production any longer so, I couldn't tell you with conviction what the turnaround time is as, there are almost as many factors in underwriting for a new home purchase as there are in a FICO score. Were you current up to the short sale or foreclosure? Did you get offerred and turn down a modification as an alternative to foreclosure? Was your short sale due to military relocation? Was it a strategic default? Did you buy another home before the short sale or foreclosure? The answers to these questions will cause your wait times to be from 0-84 months to be able to purcahse a new home using conventional financing methods.

This is your decision and yours alone. Everyone here has an opinion and of course, you'll take it all in and come to your own conclusion and hopefully make the best decision for you and your family. If credit and access to it, unhindered and uninterrupted are important to you now, you may not want to risk that 815 FICO score but, if there are other equally important factors in your decision making process, you may want to take the short sale route.

I will end my two cents with this. MA was and probably still is a recourse state so, a short sale may still have tax implications for you to consider. The insolvency test many others pointed out are valid points to consider and may assist you. Imminent default is a valid hardship as well and you would have to document that hardship with your hardship letter and income/expense budget you have to provide, along with tax returns and paystubs and bank statements. If the numbers work, a short sale may be an option the lender would consider. I would hold out for a deficiency waiver if Fannie allows it.

Let us know what direction you go and good luck to you...

Frank Fiore Jr · Answer

@Wayne Brooks .... Staying within the payment of 90% of taxes for the year, this 80K hit is going to push me to a new tax bracket and if I don't make payments I will  be well outside the 90% of estimated taxes owed. http://www.irs.gov/taxtopics/tc306.html "Topic 306 - Penalty for Underpayment of Estimated Tax"

To Short Sale or Not To Short Sale That Is The Question?

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