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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 different workout options effect your liablity for the loan balance, taxes and credit
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 law do not apply to short sales.
Credit
The field of credit scoring seems to be designed by the Fair Issac Co to be a bit vague. But the consensus seems to be that the basic 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 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: if you are contrasting walking away vs attempting a Deed in Lieu, you may wish to consider that a persons reading your credit report in the future may consider the deed in lieu to be a more responsible course of action.
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.)
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. However, there are still some wrinkles that some lenders like to include in their deed in lieu documents. For instance some lenders wish to reserve the right to foreclose. This is something we think should be avoided when negotiating a deed in lieu. It is far better to work out problems with title ahead of time.
-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 ( Sunday, 04 January 2009 )
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