Can I sell my house while in foreclosure as a way out of my financial dilemma? If you miss a payment on your mortgage that is just a financial gust of wind. Miss many payments you are in the hurricane of default. The lender will do everything possible to keep you in your house. They don’t want the headache or expense of seizing the house.
You will hear the term the bank taking the property back, but the bank never owned the property in the first place, so the bank can’t take back something the bank did not own. In foreclosure, the bank foreclosed on the mortgage or trust deed and seized the home.
If you sell the house before the auction, at closing, you pay the lender everything you owe, including back payments and penalties. Suppose, you win the lottery or receiver a windfall, most states allow a “statutory right of redemption.” This is essentially a take-back period after the foreclosure—from 30 days to as much as two years in some places —in which you can repurchase your home.
Selling a house in foreclosure could include a short sale. A mortgage short sale occurs when a financially distressed borrower arranges a sale for less than the outstanding mortgage balance. The lender accepts the proceeds of the house sale which is short of the full repayment of the mortgage. The borrower, then, receives a release from the mortgage obligation. The lender does this to avoid what would amount to larger losses for the lender if it were to foreclose on the mortgage.
NOLO says saving your credit score may be the most touted reason for a mortgage short sale, however, according to myFICO, short sales, foreclosures, and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts and are considered a scarlet letter for purposes of your FICO score.
A short sale or foreclosure may be considered to be a derogatory mark on your credit even though credit bureaus do not use the word “short sale” on your credit report. Your credit report may read “paid in full for less than agreed” or “settled for less,” among other categories.
It is generally agreed that selling while in pre-foreclosure is better than going through foreclosure or going through the process of short selling. Sure you will take dings on your FICO credit score for late payments, but that’s nowhere as bad as a foreclosure on your record.
There are differences in the waiting period before you can apply for a new loan. Fannie Mae’s 2016 guidelines allow you to reapply for a mortgage four years after a short sale with a 10 percent down payment.
With a foreclosure, if due to extenuating circumstances, you may be eligible to buy another home in three years. Otherwise, the standard waiting period remains seven years, notes Fannie Mae in its latest guidelines.
When you have waited the required time after a short sale or foreclosure, lenders don’t ask if you have sold a house as a short sale. They do ask if you ever had a foreclosure.
When a lender approves a mortgage short sale, what does the lender agree to do? At the very least, the lender agrees to remove or release the lien on the property. A seller would have a near-impossible task in selling a property without this lien release.
Is the lender also agreeing to cancel the seller’s obligation to repay the loan in full? Not necessarily. Banks are generally unwilling to negotiate deficiency judgments with the homeowner after a foreclosure.
If your lender forgives you for a deficiency after a mortgage short sale, you may owe taxes on the forgiven amount. That’s because it’s considered income by the IRS, upon which you may owe federal and state income tax. Under the federal Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from your income all or a portion of the amount of forgiven debt in a short sale.
Since foreclosure and short sales are complicated transactions, we recommend you hire an attorney to review the documents. The release of lien and protection from tax deficiency are very important to your financial welfare.
As investors, we are in business to make a modest profit on any deal. However, we can help homeowners out of just about any situation, no matter what! There are no fees, upfront costs, commissions, or anything else. We offer the simple truth about your home and how we can help you sell it fast.
Give us a ring. We would love to help you understand the process and to answer all of your questions. You can reach us at 402 999.0577.