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Wednesday, March 16, 2011

5 Short Sale Myth Busters that will earn you a Living

There is much confusion surrounding short sales that is not only confusing consumers, but also making it difficult for us to understand why a short sale is such a good idea. If we aren't convinced, why would we recommend it as a potential resolution for our clients? An article was recently brought to my attention from a couple of our agents and it was interesting to see the different understanding they had after reading the article. The Article was recently published in the Detroit News regarding the ability of lenders to come after the foreclosed and short sale individuals for the deficiency. The view from the article was that the lenders or those collection agencies that had purchased the debt for pennies on the dollar, from the original lender, would have more than the 6 years, which is the statute of limitations, to come after the borrower for deficiencies. That is not the case, whether the original lender files suit or a collection agency or purchased the debt, the timeframe for action is still 6 years. See below from the article:

"Lenders have up to six years to sue for the bad debt and, once they obtain a judgment, can pursue the borrower for 10 years. If they still haven't collected, they can renew the judgment for another decade, repeating the process indefinitely."

"Collection agencies buy the debt for pennies on the dollar, and then try to track down the debtor with threats of legal action and damage to credit scores. Often, the debt may not even be legally owed because it's beyond the statute of limitations, which is six years in Michigan."

As is the case in America, anyone can sue for any reason at any time. This does not mean the threat is valid. Certainly, as the news media often does, the article made it sound as though debt collectors could drag this on and on once they had purchased the debt. The article suggests that these debt collectors will attempt to bully those who aren't familiar with the law into paying off a debt they no longer legally owe. That does not make the action legal or binding because it is beyond the statute of limitations. A judgment must be issued against the borrower within the 6 year statute of limitations. If the judgment is won, the collection agency then has up to 10 years to collect on the judgment.

Short sales, like the rest of our industry are a work in progress and the processes and rules are changing every day. That makes consumers need our expertise all the more and creates an opportunity for us to grow our income if we are willing to put effort into getting the education.

5 Biggest Short Sale Myths:

1.) I will be taxed on the forgiven debt. Through 2012, any primary residence that is approved for short sale is exempt from paying income taxes on the forgiven debt.

2.) It will ruin my credit. Most lenders do not require that you miss a payment to qualify for a short sale. It used to be a requirement, but many of those have changed. Without missing payments, credit is minimally affected compared to a foreclosure.

3.) I have to suffer a financial hardship in order to qualify. This is a common misunderstanding. Non-financial hardship examples that are eligible include medical, increase in family size beyond the home capacity, divorce/separation, etc.

4.) I won't be able to buy another home right away. If your hardship is not financial, you may qualify to be eligible for another mortgage immediately. For example, a person who is relocated more than 50 miles for their job could qualify for a short sale and still be eligible to receive financing to buy another home. Of course, there is always the option of paying cash or land contract if resources are available to you.

5.) The lender can still come after me for the deficiency even after the short sale. Not true if your loan is owned by Fannie Mae or Freddie Mac, this is about 80% of the mortgages out there. According to guidelines, any Fannie or Freddie loan makes you eligible for the HAFA program. As such, the deficiency on your loan is forgiven when the short sale is approved and the property sold. If not Fannie or Freddie, the debt can be extinguished as a piece of the short sale settlement directly via the contract between the lender and homeowner.
***** By the way, if the customer decides foreclosure is their best option because they think it removes them from the debt obligation, please advise them to look at the note they signed. Most notes will indicate that the lender reserves the right to come after them for any deficiency if a foreclosure sale does not result in full repayment of the debt. The decision to let the house go to foreclosure is more likely to allow the lender an opportunity to come after the homeowner within the next six years.

From The Detroit News: Even After Foreclosure - Debt Collectors still pursue borrowers for repayment

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