Short Sale Pros and Cons
It is happening all too often in today’s market. Your home is not what is worth last year, or even a few months ago. Professionals are now calling it an “upside-down house” in which you owe more on the mortgage than the house is now worth. If you cannot ride out ride out the financial storm, then you may want to consider a short sale to avoid a foreclosure situation.
A short sale is when the house or property is sold for less than the balance due on the mortgage. The lender takes the loss, but not as much as a foreclosure process. A short sale is not always the best option for everyone.
If you are thinking of doing a short sale on your home, here are some pros and cons to consider:
- No Foreclosure – Foreclosures can be a very hard and stressful process for a family. It can take anywhere from six to twelve months for a foreclosure to complete.
- Being proactive – Facing foreclosure head on will help give you some control over the process. By choosing a short sale, finding a buyer and negotiating terms with the bank, the huge effect on your credit score by a foreclosure can be dodged.
- Start Newer, Faster – Minimizing damage to your credit score can help you and your family get back on your feet faster. You’ll be eligible to purchase another house faster than if you entered foreclosure.
- May not owe anything after the Short Sale – You can try asking the bank to cancel your debt altogether. It does happen, but not all the time.
- You no longer need to pay large monthly mortgage payments
- The lender may forgive the difference in debt between what you owe and the final price.
- Your credit score will usually recover more quickly than a foreclosure
- You can re-qualify for a new mortgage loan more quickly than a foreclosure
- You are more likely to escape bankruptcy
- If you are not able to pay the mortgage premium, or work with the lender on getting a lower monthly payment, a short sale is the best case scenario…even though it means losing your home and investment.
- There is still damage to your credit – When a short sale is done on your home, it is still documented on your credit but won’t have the same impact as a foreclosure for most creditors. Although lenders will view a short sale somewhat similar to a foreclosure. The chances of getting a home loan will be slim during the ‘wait period’.
- Tax Consequences – there may be tax consequences if the bank forgives the debt and will issue a 1099 for the amount of debt forgiven. This form is sent to the IRS to allow the bank to write off the loss. The IRS treats the forgiven debt as a taxable income which means you will need to pay taxes on the amount owed. Although due to the Mortgage Forgiveness Debt Relief Act of 2007, no taxes are owed on the forgiven debt.
- Bank Could Demand Payment for their Loss – The bank doesn’t have to forgive the debt. They are able to ask you pay them back for the difference on the sale and what is owed, but you’ll need to agree to this.
- The lender does not have to say yes to a short sale.
- You must show proof that you cannot make your mortgage payments and the proof must be reasonable. The lender will not approve a short sale if you gambled your savings. A few hardships accepted are such things like illness, divorce, or a job loss.
- The lender will make sure you do not have any recourse, savings or other assets to pay off the rest of the debt.
- A short sale is not short. It is a long process and it depends on how quickly you put together the right papers, how it is provided and how quickly the lender reacts. There are many people in this situation, creating a backlog in the process.
- Lenders are notorious for not communicating quickly to approve short sales.
- If your home has liens, 2nd mortgages, or a home equity line of credit, each lender has be consulted for approval, which can take up a considerable amount of time.
- Once the lender approves the short sale, the successful transaction depends on a good offer from a good buyer.
- The lender may require you to sign a promissory note for the debt forgiveness in order to approve the short sale.
- The lender may pursue a repayment of the debt forgiven after the short sale is completed.
- Your credit score is going to take a hard hit as it would if it went through a foreclosure. Consult tax and legal advice.
- You could be taxed on the debt forgiveness if the property sells for more than 2 million or is not your primary residence. Consult a tax professional.
There are no guarantees in a short sale whether the bank will approve the bank or even forgive your debt, but Short Sales offer a better alternative to minimize the downside of facing a foreclosure.
A short sale is a difficult process for both the seller and buyers. There are so many details involved (more than what the average homeowner is aware of). Make sure to consult professionals.
Contact us about buying or selling your home.