Short Sales & Foreclosures with Real Estate Attorney Bob Notestine
Pros and Cons of Foreclosure?
From a credit standpoint, a foreclosure is nearly as harmful as a bankruptcy, so I recommend avoiding foreclosure if possible. If a borrower needs to sell quickly and can't an auction is a possibility in some cases. Another alternative being pursued by many borrowers is to lease or lease option the house to get income to pay the payments. Some owners are even moving into efficiency apartments to rent their units. Try to avoid a foreclosure if possible.
Is there a deficiency judgment or a 1099 associated with a foreclosure if the bank takes less than what is owed?
Yes- the lender will report the forgiven principal and interest to the IRS and it will create tax liability for the borrower.
Is there a way around that? If yes, how?
A borrower could possibly arrange for a short sale with a separate agreement to have a repayment of the balance still owed over a period of time. If the debt is not forgiven, there should not be a deficiency report to the IRS.
What are the pros and cons of a short sale?
One con is that they are not that easy to do. Lenders are usually large corporations in different parts of the company and it is difficult to find and get through to a real decision maker. You normally have to go through a layer or two of collection folks to find someone who can make a decision. Many people start the process too late as it normally takes time. Another con is the "phantom income" report to the IRS mentioned above.
Between short sale and foreclosure, which is the better option and why?
Short sale is definitely the better option in that it is not coded as a foreclosure in most case and will be less damaging to the credit report. As I said before a foreclosure will likely stay on a credit report for 7 years at least. Also, if the foreclosure sale does not bring the amount owed , under Tennessee law the lender can sue for a deficiency judgment for the remaining amount owed.
When is foreclosure a better option than short sale?
Basically when there are no other alternatives. It is a last resort measure that happens when you can't sell, refinance, short-sale- or lease your property. I recommend paying your mortgage if you have limited resources over credit cards. In fact, I am not much a believer in credit cards as too many people are virtually drowning in credit card debt.
If I want to keep my home but I can't afford the payments, is there anything I should know about the loan modifications being offered?
Most of them are stop-gap at best. They usually involve a temporary deferral of a number of payments or a temporary decrease in payment (not interest) rates. They are intended to help for the short term but most I have seen expect full payment ultimately. There may be some lenders offering a reduced interest rate but I have not seen any permanent interest rate decreases.
Are there any cons to the loan modifications?
It just depends on the change in terms being offered. Some lenders are offering substantial changes in loans while others are not. The key thing to look for is whether changes are permanent or, if not, when does the change end. Also important is when does repayment of any deferred payments begin.
When purchasing a home, what types of tenancy should I be aware of?
The most common mistake I see is that an unmarried couple often buy property with the intent that if one dies the survivor would take his or her interest. However the deed just lists their names. Under Tennessee law this creates a tenancy in in common which is not a survivorship relationship. In other words, if one owner dies his or her interest passes to his or her heirs and not the other owner. If co-owners wants survivorship to the other owner they need to specifcally request at closing that title is conveyed to them as joint tenants with right of survivorship.
What is the deed of trust?
Many people mistakenly think this is the deed or title document. It is neither. It is the most typical type of mortgage instrument used in real estate loan transactions in Tennessee.
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