In real estate circles, short sales are perhaps one of the least understood types of transaction. This is by both the owner of the home as well as those in the realty industry. For those homeowners who are facing foreclosure, understanding the meaning of short sales is vital.
The Long and Short of It
Short sales are part of the foreclosure process and the least understood or even explained. There are times when financial difficulties will not allow you to make all the mortgage payments on your home. You may find yourself in such a situation where you may end up having the home foreclosed. Depending on the state you are in, it can take anywhere between 6 months to a year. It can also end up being auctioned off at the Sheriff’s Sale.
It is in such cases, when you as a homeowner are left with absolutely no alternatives as far as financing goes or luck in getting your loan altered that a short sale will help. What it simply means is that you can take the opportunity to sell your home for a bit less than what you owe on it in the first place. This means that if the total cost of selling your home, inclusive of the costs of closing and commission is more than the house’s current market value, you are then a perfect candidate for short sales.
Getting out of the Deep End
A short sale should not be treated as an escape route but rather a good chance for you to avoid foreclosure on your home. It of course comes with its own set of consequences. But even these are not as bad as having a bad credit history inked in your name thanks to foreclosure. Things work out for both the owner of the house as well as the bank involved in this way. Some of the positives are:
- As a homeowner, you can prevent foreclosure on your home
- With a short sale, you can actually finance another home for yourself in lesser time than a foreclosure would allow you
- In a short sale, you can continue to occupy the home as long as it takes to complete the sale. For the lenders, it is good thing that the house is occupied.
- The impact on your credit history is significantly lesser
How does a Bank Benefit?
Banks are not interested in owning property. For them the business of lending money and getting their interest on it is more than enough. A non-paying homeowner is considered a non-performing asset and in the end will cost them. If the homeowner opts to have a short sale, here is how the bank will benefit:
- The cost of foreclosure is removed for the bank, especially on properties where they are owed in excess of $40,000.
- They are not saddled with property they do not require.
- Non-performing assets can be quickly liquidated.
- In a short sale, the lender is sure to get a bigger share of the money than he would in the case of a foreclosure.
The Short Sale Process
There is a significant amount of paperwork involved in a short sale. You should also have a provable hardship such as being pink-slipped, or having a business failure, the death of an earning spouse, sickness, inheritance, medical bills that you are unable to handle, excessive debt, job relocation you can’t avoid and the like.
The bank will make it necessary that a realtor has the listing of your home. The bank will definitely want proof that you have tried your level best to get the best price you can for the house and no one is better than a realtor is for this kind of job.
Consequences of a Short Sale
Just as with any transaction, the short sale too has its own set that you have to deal with. There are times when a lender may file a deficiency judgment in court and they can pursue the action related to this whether or not you sell via a short sale or foreclosure.
There are also chances that the lender will ask you for a promissory note for the full amount or a partial one to the value of the deficiency. The promissory note is something that you can negotiate with the bank, before you close a deal on the house. As expected, another consequence will be that your credit rating will definitely go down. There are no definite levels on how much it will come down and this will depend on how your score has been so far.
There are also tax consequences. This means that if you are not eligible for the Mortgage Forgiveness Debt Relief Act of 2007, you will find yourself in a position where you have additional tax burdens. Right up to the end of the year 2012, forgiveness of debt can be taxed.
Sitting down with your accountant will be a good idea here. As far as any of the legal and financial matters go, it would be best to consult with lawyers and accountants so that you are guided correctly.
