"Important Notice: David Welch and Remax 200 Realty are not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit."
After 2013, if you short sale your house, you may have to pay taxes on the debt your bank forgives. (ex. You owe $200,000 and short sale for $100,000. Your bank forgives $100,000. The IRS taxes your for $100,000 of income.) If you are thinking of a short sale do NOT wait.
What is a Short Sale?
Quite simply is short sale is a situation where the value of a home is less than what is owed on the home. In other words the owner owes more than the home is worth. You have probably heard a car dealer say that you are "upside down" in your car. In a short sale the owner is upside down in his house. The next question is how does this happen? There are a couple of different ways that this happens, and it can effect the outcome of the sale.
First, there have been a lot of people purchasing homes in the Orlando real estate market over the last couple of years with 100% financing. If you financed the enitire value of the home, and then the value of the home goes down, you will be short or upside down. The simple solution to this situation is don't move. The fact is that home values have gone down in Orlando, and they will go back up. Just stay in the home until you regain that lost equity. This is easier said than done. You see a lot of the 100% financing also had adjustable rates, and many were interest only for a period of time. Many of these interest only, adjustable rate 100% loans have had their first rate adjustment (up) and the interest only period is expiring, so principal is being added to the payment. Some of these loans fall into the category of "sub-prime" and offer features such as negative amortization which actually causes the principal amount of the loan to go up for some period of time.
The second way you can find yourself in a short situation is through re-financing or home equity lines that allow the owner to take out additional debt against the equity in their home. This sounds benign enough until you factor in the offers of equity lines up to 25% above the equity in the home. In other words, if you have $100,000 equity in your home they would allow you to borrow $125,000 against that equity. Owners that are now upside down because they borrowed more than the home is worth have gotten themselves into a short situation. The lenders have been less likely to work with these owners to help them out of their situation. Their view is that the owners got themselves into this situation by borrowing more than the home was worth.
The third way homeowners end up in a short situation is through default. Values may not have gone down so much, and they may not have borrowed more than the home is worth. If the homeowner gets behind on their payments, late fees, penalties and interest can continue to pile up additional debt on the home until it is in a short situation. These types often happen because of economic, health or personal family situations.
Currently, what I am seeing in the Orlando real estate market is combinations of all three of the above situations. Keep in mind that every story is unique to some extent, but there are many similarities. Nobody saw the turn around that we have experienced in Orlando real estate over the last three years. Homes were selling in hours, for over the asking price with mutiple offers on them. Now homes are sitting for months without even getting a look. Home prices were going up daily, in fact appraisers were having a hard time keeping up with them. Today there are hundreds of price reductions each week and appraisers are having a hard time keeping up with the decline. I don't mean to sound doom and gloom, because I really believe that we have bottomed out and turning around. (read my blog for more on the current Orlando real estate market situation)
The truth is that some people paid too much for their home, some people were taken advantage of by unscrupulous lenders, some people borrowed every dime they could take out of their home, and some people just had bad things happen to them. Whatever the situation is, they find themselves upside down in their house, and they need to get out. If this is your situation, contact David Welch with Re/Max 200 Realty. I won't make any judgements about you or the situation you are in. I'm here to help you, or refer you to someone else who can help. You have options other than just giving your home back to the bank. We may even be able to help you avoid completely ruining your credit. Call me at my direct number 407-924-7670, and we can get together to discuss your situation. There have been some short sale guideline changes from The Fed that may shorten the short sale process.
David Welch, Orlando Real Estate Blog, Follow Me on Twitter, As Seen in HGTV's House Hunters