A recent analysis indicates that more than one third of mortgaged homes in the Seattle area are now worth less than what the owners owe on their mortgages. This situation is known as “negative equity”, and helps explain why short sales and foreclosures are again on the rise.
In a short sale real estate transaction, the mortgage lender agrees to accept a payoff of less than the balance due on the loan, which many homeowners consider an attractive alternative to foreclosure. In some cases however, the lender’s approval of a short sale DOES NOT necessarily mean the lender relieves repayment of the entire debt. According to the Washington Department of Financial Institutions Short Sales Seller Advisory:
It is possible the seller can sell the home and still owe the unpaid difference, plus interest and penalties, to the lender (the “deficiency”). The lender may then seek a deficiency judgment against the seller for this difference. If the judgment is issued by a court, it could be in effect for up to 20 years if not paid sooner This is one of the most fundamental issues that sellers must address in considering whether to sell property as a short sale.
Simply “Walking Away” from the property through foreclosure also does not necessarily relieve a seller of these debts as while Washington State is a “non-deficiency” state, that only pertains to the foreclosing party. A homeowner could lose their property to foreclosure, generally to the 1st mortgage lien holder, and still owe the balance(s) from the 2nd mortgage or other lien holders.
Additionally, when you borrow money from a lender and that lender later cancels or forgives the debt, that debt becomes taxable income. But, the Mortgage Forgiveness Debt Relief Act provides an exclusion to this rule when the canceled debt was used to buy, build or substantially improve a homeowner’s principle residence. This includes debt forgiveness through loan modification, deed in lieu of foreclosure, short sale, foreclosure, and bankruptcy.
Homeowners worried about foreclosure may also be susceptible to predatory “rescue” scams. Unfortunately, foreclosure and loan modification fraudsters take your money, can ruin your credit, and can wipe out any equity you may have in your home. If someone offers to negotiate with your lender, or offers to arrange to stop or delay foreclosure for an upfront fee, carefully check his or her credentials, reputation, and experience.
Protect Yourself and Learn More About Your Options
This may sound counterintuitive, but the first thing you should do is contact your lender directly. They really do not want your home, and have loan workout options available to help you keep your home (forbearance, mortgage modification etc…).
Consult with an attorney before making any decisions or signing any paperwork. Talk to them about the issues discussed above, the impact on your credit rating, and tax consequences.
If you are unable to afford an attorney, contact the Washington Homeownership Center at 1-877-894-HOME (4663) for non profit foreclosure counseling. If legal advice is needed, callers will be referred to a pro bono attorney through the Washington State Bar Association.
Washington Homeownership Information
A one stop resource center for homeownership and foreclosure information for WA State residents.
Washington Foreclosure Prevention Resource Guide (pdf 2.1MB)
An excellent guide addressing all issues related to the foreclosure process in WA State.
Short Sales – Sellers Advisory
Everything you need to know about short sales in WA State.
####
Please do not hesitate to contact us here at Infiniti RED if you have additional questions. Whether you’re thinking of buying or selling in the current market, we’re here to provide you with the information you need to make a truly informed decision.
