Myth #1 You must be behind in your payments to do a short sale.

Absolutely NOT true! I and my clients have been told this by many different professionals; realtors, bankers and lawyers who claimed to be  short sale experts, some even advise people to stop making their payments, yet I personally have had short sales approved for people who NEVER missed a payment, the bank worked with us to allow the house to be sold quickly and the credit of those homeowners have remained intact.

Myth#2 The lender will never approve a short sale if you owe too much or your home has decreased in value too much.

Not true, the lenders base their decision on a formula which starts with an appraisal of the house for its current market value(BPO) and then compares the amount of money which they would receive from the proceeds of a short sale to the money that they would receive from the house sold at auction as a foreclosed property, including the high costs of foreclosing and maintaining  the home.  Generally, short sales are much, much less expensive for lenders.

Myth #3 You will never be released from the debt of your second mortgage in a short sale if it is an “equity line of credit” and they will “come after you for it later.”

Absolutely NOT true.  I recently completed a short sale where I negotiated that the banker released my client from over $100,000 worth of debt that was on her second equity line of credit, no future repayment will ever be required of her. This will not be the case for everyone, and sometimes the bank will not forgive the second but often they will. Often times they settle for a greatly reduced amount paid to them out of the sale proceeds by the first mortgage holder, each decision is made on an individual basis. However, if you foreclose you will not be automatically released from any of your obligations and they can and probably will “come after you” especially if you owe money on a second and or an equity line of credit since you did not negotiate any sort of settlement with your mortgage lender and the investor.   

Myth #4  A short sale can be as “bad” to your credit as a foreclosure.

NEVER! While it is true that the effect that a short sale can have on your credit score can vary considerably depending on your starting credit score, amount of payments missed and how the short sale is reported by the bank to the credit agencies it is always considered better than a foreclosure on your record. A short sale shows future lenders that you acted in a “responsible” manner and “sold” your home for as much as the current market would allow and “settled” your debt rather than just walking away. In fact the lender makes  final decision of how to report your short sale on your credit report as either “paid in full” the best way to report, “paid as settled”  which can lower  your credit score either not at all, very slightly or many points or “unrated” a neutral report which does not lower your score.  

If you allow your home to be foreclosed on it is reported as “foreclosed” a VERY negative statement on a credit report which shows both a lack of responsibility and your score will take a huge drop. Your account has not been “settled” and while there are laws in California that protect a homeowner from a deficiency judgment on a “home purchase money loan” after foreclosure, there is nothing to protect you from a future lawsuit brought about by the bank and investors for any second mortgage or equity line that you may have, this MUST be negotiated with them in advance of foreclosure or short sale or deed in lei(where you give the banker your deed) which is also very bad on your credit report

A homeowner who loses a home because of a foreclosure is ineligible for a loan backed by Fannie Mae for 5 years, however if the homeowner sells their home by means of a short sale they will be eligible for such a loan in only 2 years. An investor who allows his property to foreclose will have to wait 7 years for an investment mortgage but if he had his realtor successfully negotiate a short sale then he could acquire a new investment mortgage in only 2 years also. 

A foreclosure will commonly lower your credit score between 250-300 points and will affect your credit for 3 years or more. Often times with a short sale it is only the late payments that will show and after the sale it will be reported as either paid or settled and may not lower it at all or may only lower it as little as 50 points. The affect of a short sale on your credit may only last for 12-18 months.

A foreclosure will remain as a public record on your credit history for 10 years or more but a short sale is NOT reported on your credit history, and that makes a BIG difference!

Myth #5 A deed in lieu of foreclosure is better than a foreclosure and no worse than a short sale

Neither foreclosure nor deed in lieu of foreclosure are  listed as “settled” on your credit report, it is unclear as to whether the deed in lieu of foreclosure is looked upon any more favorably on your credit report than a foreclosure. It is certainly less expensive for the lender to do than a foreclosure but does not release the homeowner of any secondary debts or tax liability so the benefits to the home owner are questionable. Beware if you do have a second equity line, if the house is sold for a very low price at auction or placed back on the market by the lender as an REO the deficiency judgment against you can be huge, usually the deficiency is greater when a house is sold as an REO or auction than as a short sale.

Myth # 6  If you do a short sale then you may be liable for extra taxes that you would NOT be liable for if you let them foreclose or do a deed in lieu of foreclosure. (This myth is a big one and commonly misunderstood)

ABSOLUTELY NOT TRUE!!! The same possible tax consequences exist even if you let them foreclose or do a deed in lieu of foreclosure, all that matters to Uncle Sam and IRS is whether or not the amount of the unpaid debt qualifies for relief under the IRS guidelines. According to the IRS section 61(a)(12) lenders are required to report the unpaid debt amount on a form 1099-c to the IRS.  You would need to discuss with your tax professional whether in your particular financial situation you qualify for tax forgiveness guidelines from the IRS. Many people do in fact qualify for debt tax forgiveness under the “Mortgage forgiveness act of 2008” for acquisition money consisting of  purchase money, home building money and improvement money.  Often times debt tax can also be forgiven under the rules of insolvency, used often when the homeowner does not qualify under the acquisition money rule but when the homeowner’s liabilities exceed the fair market value of the home. Only a tax professional can give you advice on these matters and I strongly recommend that you talk with one since I am not an accountant and cannot give out tax advice, everyone’s situation is different and the information presented here is merely a very general guide but is in no way intended as accurate or to be used as personal tax advice. Meanwhile some good reading on the subject can be found at:

http:// taxesabout.com/od/income/ss/mortgage_cancel_5.html   

Two very useful publications for mortgage debt tax relief qualifications can be ordered for free by phone from the IRS that better explain these tax rules at:

 1-800-829-3676:

 Mortgage relief for acquisition debt tax:  IRS publication form 982

Insolvency and the laws about tax relief from it: IRS Publication form 908

Myth #8  Everyone who owes too much on their home can just “dump it” and do a short sale

No, that is not true. Many people in every social and financial status do qualify for short sales, even Donald Trump, but not everyone does. A realtor who is a short sale expert will do an evaluation to see if you qualify for a short sale. The major factor that qualifies a person for a shortsale is “financial hardship,”  meaning that it has become difficult for the homeowner to continue to pay the mortgage. 

Myth #9  If I did not qualify for a loan modification then I probably would not qualify for a short sale either

No, they are very separate from each other. I have completed very successful short sales for clients who were unable to work out a successful loan modification with their lender prior to listing their homes for sale. 

Myth # 10 If I am planning on filing a bankruptcy because of my other debts or have recently had a bankruptcy then there would be no point in selling my house as a short sale since my credit scores will be hit so hard anyway.

Absolutely not true! Many  bankruptcy lawyers will ask the judge to allow the home to be sold as a short sale as part of the bankruptcy because they know that the homeowner still should try to avoid having a “foreclosure” placed on their credit history for up to 10 years. They also can often get the 2^nd equity line along with other liens dismissed in bankruptcy court. Most lenders actually have a bankruptcy department that  I negotiate with regularly. There is a split of opinion among attorneys on whether it is best to do the bankruptcy before or after the short sale and there is some logic supporting each point of view. The answer to that question is very individual and should be discussed with your own attorney. However, it is agreed that the foreclosure on your credit record for many years can and should be avoided if possible and a short sale is a good, no cost to you way of doing so.