Short sale vs foreclosure

[Gophernut]

My wife and I have unfortunately separated. Not my idea, but not much I can do about it. My question is this. Neither of us can afford to live in the house we have had for the past 8 years. We owe more on it than the current market value. I need some solid info on what the implications are for each of these. What happens to the balance after a short sale? What are the tax ramifications after wards? Foreclosure seems like a really negative thing, and I really don't want to walk away from the house and let it go back to the bank. Getting roommates is not a plausible answer, and I don't know that it would be able to be rented out in order to keep it and allow for a market recovery or a change of heart from my wife. Any advice would be greatly appreciated. We are current on our mortgage and bills, but with the income basically being slashed in two, neither of us can do it. We are not leeches, and don't want to ruin our credit, but what are our options?
Thanks

[SteveH]

Damn man...Sorry no real input other than to say that I'll keep you in my thoughts !

[jjirons69]

Same here, Steve.

[Starz26]

If you get the bank to agree on a short sale, you will not be responsible for the diff between the sale price and the loan value.

If you are foreclosed on, the bank can come after you for the difference.

As for tax ramifications, I have no clue....

Someone please correct me if I am wrong. Oh, and both will mess up your credit for a good while but that is the least of your worries in these situations.....

What about a loan modification?

Hope all gets better......

[AlohaStyle]

I agree with Eric but can't expand further. A short sale I believe is a better route to go if you can get the bank to agree to it, but it will still hurt your credit. I would simply talk to your lender and see what options you have. Talking to my mortgage broker who is a family friend, he said it's hard to get lenders to do anything unless you are already behind in payments. Obviously there can be exceptions, but I personally was told I'm screwed with my mortgage.

Doing quick google pulls up this older, but basic info:

While a short sale will save you from foreclosure, it will also have a negative effect on your credit score, frequently lowering it by as much as 200 points. This can be overcome more quickly than the black mark of a foreclosure, especially if you manage to retain one or two credit cards and keep them current. Perhaps equally distressing, the Internal Revenue Service frequently deemed the difference between the mortgage balance and the amount realized from the short sale to be taxable as income despite the fact that the debtor never saw a dime of it. There is new federal legislation called the Mortgage Forgiveness Debt Relief Act 0f 2007 that just went into effect on January 1st, 2008. The new act essentially eliminates this problem.

This is also a quick snapshot of pros/cons:
http://homebuying.about.com/od/foreclosures/f/072509_Short-Sale-vs-Foreclosure.htm

[AlohaStyle]

If you sold before 2012 ends, looks like you wouldn't be taxed on difference:

http://online.wsj.com/article/SB122727771262147895.html
As for your tax situation: because of the Mortgage Forgiveness Debt Relief Act of 2007 and the recently passed Emergency Economic Stabilization Act, you can exclude up to $2 million of income ($1 million if married filing separately) from debt that's discharged through mortgage restructuring, or that's forgiven in connection with foreclosure, for the years 2007 through 2012. The exclusion must be connected with a decline in the home's value or the taxpayer's financial condition, and only applies to a principal residence, not investment properties. You can claim relief on your principal residence through IRS form 982.

[AlohaStyle]

Very sorry to hear the circumstances for you brother. I'll be interested in learning the outcome as I will probably have to cross this bridge before 2012 is over too as my ARM mortgage will reset higher the Summer of 2013 with our house value below what we owe.

[awsmith4]

If you get the bank to agree on a short sale, you will not be responsible for the diff between the sale price and the loan value.

If you are foreclosed on, the bank can come after you for the difference.

As for tax ramifications, I have no clue....

Someone please correct me if I am wrong. Oh, and both will mess up your credit for a good while but that is the least of your worries in these situations.....

What about a loan modification?

Hope all gets better......

I would try for a loan modification first

What Eric said about the remaining balance after a short sale is true but make sure it is in writing from the bank that they are forgiving the difference. Even if they allow the sale to go through you are on the hook for the balance unless you have an agreement stating otherwise.

Another option is to try and sell, at least for the time before you officially default, you never know.

[chippewastud79]

Short Sale > Foreclosure.

For the items outlined above, the bank is absolving you from any extra balance left after the sale with a short sale.

Banks are willing to wheel and deal these days, they don't want foreclosures anymore than the owners do. Definitely contact the bank, tell them of the situation and see what options are out there. With recent turns in the market, you could easily get a reduced rate and a lower payment. Don't underestimate renting, if you can come close to price of the mortgage payments (~$300 or less of the balance) it would definitely be something to consider.

Sorry to hear about the situation, but I hope it all works out. :2

[cmitch]

You can ask for what is called a 'Deed in Lieu of Foreclosure' which is basically giving up all rights to the property to the bank in exchange for title of property to the bank. This would absolve you of any liability should the house short sell. You do not mention if you have other assets such as other property, retirement accounts, IRA's or Roths. This could technically come into play if the bank balks at a Deed in Lieu of Foreclosure because the bank isn't interested in losing money, which they would in your case. It's unlikely the bank would agree to this if your house is worth less than you owe.

These are the kinds of jams folks find themselves into when they buy a house with very little money down and coupled with declining market values.

It's really hard to tell you what would be the best in your case since you don't mention how much you're going to be upside down IF the house does sell.

One other thing to ponder is what kind of cars do you both drive? Are they relatively late models with enough equity to sell them to help limp along or to make up any difference that you might owe? Short of waiting on a foreclosure where you lose the control over what your house sells for, I don't know what else you could do not knowing specific details.

I pray all works out and this sounds like a bad situation to be in. I hope you can get it together and get back together because it sounds like a split is going to do you both much harm, financially and emotionally.

[Gophernut]

Well to try and supply more info, I figure we are about 40K upside down. Don't know what the total will be with closing costs, commissions, etc. I would guess around 60K. We are current, and our bank will not help us unless we are not current. It feels sort of counter-intuitive to talk to your lender about help, and they suggest not paying them.??? We do have cars that are both 2008 and we are current on all bills. No credit card debt, some medical debt, but manageable. Just have too much house for one person to handle. We at one point had almost 100k equity, but now it's gone the way of the housing market. Negative. Thanks for the info so far, and any other thoughts are very welcome.

[floydpink]

I just had dinner with a good friend who is an executive at a very large bank with lots of knowlege.

According to him, the average time for a bank to move forward and complete a foreclosure is 3 years, which essentially means you can stay rent free for 3 years, not considering the implications regarding credit and the uncertainty of eviction, not to mention hounding from bill collectors.

He says, locally, it is a longer period due to the amount of foreclosures in our area.

If nothing else, it buys you plenty of time to decide, although your credit will suffer.

[shilala]

After going through the hell of this in the last few years, the best solution I can suggest is to go see the bank, explain the situation, and see if an interest-only loan would be acceptable to them.
You'd lose your ass for a period of time, but that cost will save your credit.
I'd not hang my hopes on the market rebounding. It's not trending and not likely.
Hopefully an interest only loan will buy you time, whether it be what you guys need to reconcile, or time for you to find some other options.
Just be patient and know that the bank does not want your property. They'll be as inventive as they can possibly be. :tu

Prayers for you and your wife, my brother. I wouldn't wish this pain on anyone, and I hope you and the wife can resolve your differences.

[Starz26]

It feels sort of counter-intuitive to talk to your lender about help, and they suggest not paying them.??? .

This

My buddy just went through the same thing. He was current but struggling. So he did what they said, stopped paying, House was in foreclosure and sheriff sale was getting close but he finally got a loan modification. Ruined his credit though.

If you do go this route, do what he did and save the monthly house payment, that way if the loan mod does not come through in time, you can catch up and avoid foreclosure.....

Best wishes

[Mattso3000]

This same scenario happened to my BFAM back in 2007 but it just so happened that my wife was going through BMT and we were looking for an inexpensive living arrangement. We split the mortgage and house 50/50 for 3 years when we decided to take the plunge and buy a house of our own. His new fiance moved in and things went perfectly.

There is a solution for you out there, just keep the chin up and you'll find it.

On a side note, if you need a cigar to relax there will be one for you at Burn in Burnsville if you feel like making the drive. I'm heading over shortly and will be there till ~2, there's some decent stuff in the vault.

[cobra03]

Its a pain in the ass if you dont want to be a landlord but you could consider renting it out for a few years in hopes that the market turns around and you pay it down some more. i dont know if its feasable in your situation and trust me i speak from experience its kind of a pain but its better than taking a bath trying to sell or going into foreclosure.

[billybarue]

40K upside down and the situation your in you need to sell NOW. As mentioned, market trends aren't bright.

Talk to the bank and see if you can re-structure.

Get the house on market ASAP - BY OWNER. Any one can do it, and you need to save those commissions to put against your being behind on the mortgage. If your house is 250K, than you'll save $15,000K (6%) in sales commissions. You need to give that 15K to the bank that holds the note on your house - not a realtor. Even if you have to get the house sold below market (or appraised) value - you have 15K to play with if you sell by owner (FSBO).

You are coming up on Autumn, a poor time to try to sell. I'd have the sign in the yard tomorrow and be re-painting and sprucing the house up. It doesn't appear your situation coupled with the economic outlook are about to improve. You need to act now. I am sorry for your circumstances and best of luck.