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Deed in lieu vs Short sale |
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California Deed in Lieu vs. California Short Sale
How do the workout options effect your liablity for the loan balance, taxes and credit
We are seeing a lot of people on the net saying a short sale is always preferable to a deed in lieu. We wonder if they have acutally negotiated deed in lieu of foreclosure or even thought about the tax consequences to the state of California.
Short Sales and Deeds in Lieu of Foreclosure and Foreclosures effect your credit, your liablity for the loan balances and your state and federal tax liablity in different ways.
We suggest you look at each option and detemine your exposure to deficiency for the loan balance. Then determine your tax liablity to state of CA and the IRS, and then assess the damage it may do to your credit.
Please note, many of California's Anti-deficiency laws do not apply to short sales.
Credit
Fair Issac and Company FICO seems to have purposely designed the credit scoring to be hazy. With respect to the major workout options, the consensus seems to be that computer scoring works like this:
Short Sale (the least amount of damage)
Deed in Lieu
Foreclosure.
Many sources claim a short sale hurts your computer credit score and or your ability to qualify for loan programs for 2-3 years, a deed in lieu of foreclosure for five years and a foreclosure for seven to ten years.
(if your property is in San Diego, Orange or Riverside counties you may wish to discuss short sale strategies designed to prevent banks from reporting 30, 60, or 90 day lates.)
Note: Your credit history may not soley be reviewed by a computer. A person reviewing your credit history may look more favorably on a short sale or a deed in lieu. Short sales and deeds lieus manifest your cooperation with your lender.
Taxes
As of January 2009 California's tax code is not aligned with the IRS's tax code. The mortgage debt forgiveness act no longer applies with respect to your California tax liablity.
Therefore, a short sale may peg some people with exposure for loan forgiveness taxes. Taxes they would not have to pay if they negotiate a deed in lieu or accept a foreclosure. If you have purchase money loans you should probably speak with an attorney before agreeing to do a short sale. A deed in lieu or a walk away may avoid a big tax bill to the state of CA. (Please not I said "may". This area of law is very complicated.)
Additionally a deed in lieu gives the borrower a chance to negotitate the fair market value of the property. (this may substantially alter tax liablity ).
Deficiency
In California there is a presumption that a deed in lieu of foreclosure will release the seller from financial liability for the underlying notes or loans.
Note: there are wrinkles that some lenders like to include in their deed in lieu documents. Be on your guard for lenders who are reserving the right to foreclose to clean up title.
-California short sales are becoming more difficult.
-Many seconds lien holders and some first lienholders are unwilling to release the sellers from a deficiency. - Sometimes the lenders just need to have the law explained to them.
-There are many strategies open to sellers while they are still current.
-Do not stop paying your loans until you have set up your walk away plan or workout strategy.
-There is no reason to assume a short sale is going to work.... particularly because more than half don't.
-If someone is telling you a short sale will save you, make them put it in writing.
-Remember a Realtor is not licensed to explain what the escrow instructions mean to you or whether your are released from a deficiency.
-If someone tells you to tells you to sign the paperwork - ask him to guarantee your release from a deficiency in writing.
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Last Updated ( Tuesday, 03 March 2009 )
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