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Orange County, CA: Short Sale Impact on Future Home Loans

Short Sale and the Impact on Future Home LoansOrange County residents who have had to short sell a home want to be homeowners again.  But they have many questions. Do I pay taxes on the amount owed? How badly does it impact my credit? How long do I have to wait? What do I need to know to become a homeowner once again?

Let’s begin by understanding what a short sale is. Wikipedia defines a short sale as a sale of real estate in which the proceeds from selling the property fall short of the balance of the debts against the property.  The homeowner is selling the home for less than what is owed and the lender accepts it. You will need to prove to the lender that you have a financial hardship. Then, a real estate agent will assist with the sale of the property like a traditional home transaction.

In some cases the short sale can lead to a deficiency judgment. This is when a creditor pursues a judgment to obtain the unsatisfied portion of the loan. The Mortgage Forgiveness Debt Relief Act of 2007 gave some financial relief to Orange County homeowners. This law allows people to avoid paying taxes on forgiven mortgage debt. But this is only allowed when it was the person’s primary home. If debt was forgiven by your lender on a second home or investment property then you will likely have to pay tax on that amount.

But there is no relief for your credit. The credit impact can vary depending on the details of the short sale and the details of the new home loan. An Orange County homeowner with a past short sale can expect to wait a minimum of 2 years before they are eligible for a new home loan. If the short sale was a result of financial mismanagement the waiting period can be as long as 7 years. In most cases, it will be anywhere from 2-4 years depending on the extenuating circumstances, mortgage type and down payment. A 20% down payment will reduce the lender’s risk and get you a new home loan quicker than if your initial investment is only 10%.

If you are not aware of the differences between a short sale and foreclosure, I encourage you to do more research. Talk to real estate professionals and a real estate attorney if you find yourself in this position. Proper planning can make a world of difference. From a mortgage perspective, a short sale is preferred over a foreclosure, because it’s much less damaging. Foreclosures will preclude you from buying a home for up to 7 years. This is true whether there were extenuating circumstances or it was the result of financial mismanagement.

These rules apply across the board. So, whether you’re in Long Beach or Laguna Hills, you’ll want to review the details of your short sale. Then you and your lender will need to take stock of your current situation.  If you plan accordingly, then a short sale will not be a permanent black eye. Many homeowners across the country and in Orange County have had to make this decision. Many more will still need to. There is a light at the end of the tunnel and the tunnel is not always that long!

Scott Storace

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