These days, with many homeowners facing a possible foreclosure and homes losing value in many markets, there is considerable interest in short sales. A "short sale" is when a home is sold for less than the amount owed on the mortgage and the lender agrees to discount the loan to ensure the sale. Here are a few key points about short sales that will help you understand if a short sale may be right for you and your situation.
Q: Who Qualifies for a Short Sale?
A: Lenders will generally only consider a short sale if you are no longer able to keep up with payments on your mortgage. Often a job loss or serious health issue will cause a homeowner’s income to fall dramatically, making it difficult to keep up with the monthly bills. Lenders will consider a change in your situation and your inability to make payments when evaluating the possibility of a short sale. Now, because home values have fallen so dramatically in many markets, lenders may consider a short even for homeowners that are able to make payments if the value of the home has fallen significantly. But they are less likely to approve the short sale if you are able to make payments or if you have substantial savings that could be used to cover the obligation of your mortgage. When you apply for a short sale with your lender, they will ask for extensive financial information – about you and your home. In most cases - to approve a short sale - they must be convinced that (a) you can’t make the payments and (b) the market value of the home is less than the mortgage balance.
Q: Why Would My Lender Agree to a Short Sale?
A: In order to accept a short sale, the lender must be convinced that the house cannot be sold for the amount owed on the mortgage. This can be demonstrated by market comparables or “comps”, which are records of recent home sales in your area that show that values have declined. Also, the condition of the house will affect its value. If the house needs considerable repairs, it likely cannot be sold at market value. So lenders will also consider evidence that the house needs major repairs.
Q: Is a Short Sale Better than a Foreclosure?
A: Generally, yes. While a short sale gives the lender less than the mortgage balance, it is generally much less expensive for the lender to accept a short sale rather than to foreclose and take possession of the house. Remember, your mortgage company does not want your house! If the value of the home is truly less than the mortgage loan balance, the short sale is often the best option for disposing of the property and resolving the outstanding mortgage debt. In addition to being a better solution for the lender, a short sale can also be better for you. While a foreclosure could reduce your credit rating (FICO score) by more than 250 points, a short sale will usually only result in an 80 to 100 point ding on your credit. A foreclosure could prevent you from buying another house for several years or more. With a short sale, homebuyers with otherwise good credit can usually buy another home within 18 months.
Q: Will My Lender Forgive the Balance Owed on a Short Sale?
A: This is something you will need to cover with your lender during the short sale process. You will want to specifically ask them to forgive the balance (the difference between the short sale price and the amount owed), and get that agreement in writing. Right now many lenders are working with borrowers and making concessions. If the lender does not agree to forgive the balance, you may find that you still owe the lender for that amount after the short sale is completed.
Q: Is the Forgiven Balance a Taxable Gain?
A: Luckily, recent tax legislation changes have resulted in new rules that do not recognize the forgiven balance as a taxable gain. Speak with the IRS or your tax accountant about this to ensure that it applies in your situation.
Q: How Can I Sell My House via a Short Sale?
A: In order to sell your house, you must have a buyer. That''s true for short sales as well. Even if you and your mortgage company are both convinced that the home is not worth the amount owed on the mortgage, you cannot do a short sale until you have found someone willing to purchase your house at the reduced amount. It''s important that the buyer is someone that understands the short sale process. It''s also to your advantage if the buyer is able to purchase with cash right when the lender approves the short sale. To sell your house via a short sale, you should either work with a Realtor that specializes in short sales (if you have several months or more to find a buyer), or you should work directly with a Real Estate Investor (if you need to find a buyer quickly).