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Short Selling: An Option other than Foreclosure

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By Dr. F. Beer, Mai Akasaka and Dong Woon Kim

The housing boom of the last decade has helped increase minority home ownership rates above 50 percent for the first time in 2004. Social scientists praise this success because home ownership encourages greater neighborhood stability and economic progress. President Bush cites rising minority ownership as an achievement under his "ownership society" programs.

Unfortunately, things have changed.  The market is crashing and minorities are losing their residents in huge amounts.  An article published in the New York Times reports that the rate of Black home ownership fell slightly in 2005.  It also reported that home foreclosures among minority homeowners could rise further in coming years due to higher rates.  The article said that the race of borrowers is not available on foreclosure documents, but studies that compare foreclosure rates to the racial makeup of the neighborhoods where the foreclosures are taking place suggest that the rate is rising higher for minority homeowners. Image

So who is to blame?  The sub-prime mortgage rates for one.  Sub-prime loans, are loans made to borrowers with credit histories that the industry considers less than prime.  These loans have interest rates that are, on average, three points higher than the prime rate and they carry higher fees and prepayment penalties that make them expensive to refinance.  Further, many of the sub prime borrowers took out adjustable rate mortgages where payments rose if interest rates rose.  Their plan was to refinance these loans using the expected increase in value of their house to help them qualify for a better loan.

Unfortunately, house values did not increase, but instead dropped!  In Riverside and San Bernardino Counties, the average price of homes has dropped by 18.6% and 16% respectively. 

Now that houses are no longer increasing in value, sub-prime borrowers cannot refinance.  This forces them to pay a much larger mortgage payment, which, they cannot afford.  Conclusion?  A sharp increase in foreclosure. 

If you have bought a house within the last 2 years, you know exactly what I mean. It is time to understand what your options are.   In this article we explore Short Selling.

A short sale is a nice option to get out from possible foreclosure and sell your house.   Here is how it works. 

Imagine that you have a house that has a $200,000 mortgage.  Unfortunately, your real estate agent states that the house is now worth $150,000.  If you find a buyer for your house, you are going to be required to come up with the additional $50K. Most people don't have as much extra cash.

When you do a short sell you need to contact the lender and get their approval to sell the house at whatever the market is at.  Sometimes lenders agree to this because they know their other option is foreclosure. When they have to sell a foreclosure they usually will only get 50 to 60% of the market value of the house.

Most people who have had a foreclosure have a difficult time buying a home within the first 3 years, unless they have a generous down payment.  Even then, their interest rate might be higher due to the fact that the new lender knows the person has lost a house to foreclosure in the past.  If you elect to "Short Sell" your home, make sure you work with an agent familiar with the procedure.  A professional realtor will assist you in avoiding a deficiency judgment for the amount of money that the bank lost.

Lenders may claim whatever debt they've forgiven as a loss on their taxes and issue a 1099 form.  In other words, the forgiven debt is taxed as earned income. You should definitely check with your accountant for this information.

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