Is a Short Sale the Answer?
In today’s market with thousands of houses for sale, many home values have remained the same or in some cases, have dropped. In years past, real estate appreciated enough to cover the difference in what was owed and what the house would sell for. Unfortunately, that is not currently the case in most areas. If you are in a position where you can no longer keep your house because of financial difficulties or another emergency situation, there may be an alternative to foreclosure in the form of a short sale.
What is a short sale?
A short sale occurs when a lender agrees to accept an amount less than what is currently owed by the borrower including closings costs.
What information will the lender want to consider before approving a short sale?
Lenders may require a great deal of information before agreeing to accept a loss on the property. They may ask for information on current employment, tax returns, a balance sheet showing assets and liabilities, bank and stock statements, a hardship letter and a comparative market analysis. Your Realtor can assist with the comparative market analysis and a preliminary net proceeds sheet.
Your hardship letter should include what circumstances have led to the financial difficulties where you need forgiveness on a potion of your debt. Most lenders understand unforeseen tragedy and may be willing to work with you.
What is the impact of selling your house in a short sale?
There are ramifications to selling your house through a short sale including the possibility that the lender will require you to pay the total amount of the loss in the form of a collection. If it is forgiven by the bank, the IRS may treat it as income and tax the amount of the forgiven debt.
Short sales can drag on for months. Lenders can take up to sixty days to respond on a contract offer. This process requires patience on the part of the buyer and seller.
A short sale may not impact your credit as heavily as an actual foreclosure. Remember to ask your lender not to report the short sale to the credit bureaus. Most of them will still make the report, but it can’t hurt to ask.
What are the alternatives?
Your lender may be willing to work with you so you can keep your house. The possibility exists that they will extend the loan for you so you can make up any missed payments or even refinance from an adjustable rate mortgage to a fixed rate loan. The best alternative, if you can do it, may be to work with your lender to keep your house. The real estate market runs in cycles. In the next few years it is bound to recover and provide the possibility you can sell your home for a profit.
Your Realtor can assist you through the short sale process. I also recommend speaking with your legal and tax professionals to ensure that you have all of the information on what a short sale will mean to your and your family. That information will allow you to make an informed decision.
Is a short sale the answer? It may be a good alternative in this tough market if keeping your house is not an option.
Dear Jen,
I negotiate short sales here in the vegas area as well as the rest of the United States, and for this market here in vegas to rebound would take a very long time. Like till at least 2013. I was watching go scout homes and 60% of the homes on the show were REO. Would you pay for a mortgage that the home was no longer worth what you had paid for it? Perhaps you should take a look at the article on ABC new from Tuesday where Countrywide the countries leading lender says that over 28% of their loans are in default. No longer C and D paper but their Prime borrowers as well. The articles goes further to say that we have not seen this kind of depreceation of property since the great depression. The articles goes even further to say they do not expect a rebound in the market till at least 2009. Also you should think about the fact that which ever Deed of Trust forecloses on the borrower the other turns into an unsecured credit card…… Just some food for thought.
Donna- Thanks for the information. I have read the media reports on Countrywide’s findings as well as suggestions that that real estate market should rebound starting in 2009. I’m hoping things improve for you and your clients in Las Vegas long before 2013.
While our market has been tough, we haven’t experienced the severe drops seen in your market. I’ve never heard about a Deed of Trust turning into an unsecured credit card. I think it depends on the loan agreement a borrower signs when they receive the loan. In most cases, since the loans are secured by the property, if it goes into foreclosure, all lenders may lose their part of the outstanding debt. That certainly does not prohibit those lenders from seeking collection.
When a seller and their Realtor are negotiating a short sale, they should remember to request the same consideration and conditions on any additional loan on the property. Once again, it is important to have professional counsel.