Could You Use a Short Sale for Your Home?
March 5, 2013
One of the difficulties that many homeowners still face is the fact that low home values make it harder to sell a home. Even now, with home prices rising a little bit, it’s still difficult to get what you paid in some cases.
If you need to sell your home, you might be able to get your lender to agree to a short sale.
What is a Short Sale?
A short sale is fairly straightforward. It takes place when the lender allows you to sell your home for less than you owe on your mortgage. In many cases, the lender absorbs the loss, forgiving you of the remaining debt.
Short sales have been increasingly popular since they usually cost the lender less than a foreclosure, and the lender can often sell a short sale property for more than a foreclosure property. It’s an arrangement where both parties can limit some of the unpleasant effects associated with not being able to sell a home for the mortgage balance.
How Can You Get a Short Sale?
Lenders have to decide whether or not to sign on to a short sale. Usually, you are required to demonstrate financial hardship before you can receive approval for a short sale. On top of that, some lenders like to see that you have tried to sell the home for a higher price first. Often, you won’t be approved for a short sale unless your home is on the market for at least 90 days.
Realize, too, that having a second mortgage can complicate matters – especially if that second mortgage is from a different lender.
Consequences of a Short Sale
Because a short sale is seen as a form of debt forgiveness, there are consequences to taking this action. Your credit score is going to take a hit as a result of your short sale. In some cases, depending on how the lender reports the short sale, your credit score can be impacted almost as much as if you had gone through foreclosure.
Be prepared for a lower credit score, which could result in a higher interest rate on your next loan. A lower credit score might also cause other problems. And, while you can still get another mortgage after a short sale, you might have some difficulty finding a lender to agree.
Another consequence might have to do with taxes. Right now, the Mortgage Forgiveness Debt Relief Act of 2007 is still in effect. It was going to expire at the end of 2012, but it has been extended to the end of 2013. Normally, a short sale results in the amount forgiven being taxed as income by the IRS. However, with the extension of the Mortgage Forgiveness law in place, you avoid taxes on the forgiven debt.
Realize that the Act might not be extended another year, so it might make sense, if you are going to attempt a short sale, to take care of it this year.
What If You Can’t Get a Short Sale Approved?
In some cases, you might not be able to complete a short sale. The lender may not agree to it. In those cases, you ned to decide what you will do next. Some of your options include:
- Continue trying to sell the house: You can leave the home on the market for what you owe on the mortgage, and hope that someone eventually buys.
- Rent the home: Another option is to move out of the home and then rent it out. You can have the new tenants essentially pay the cost of the mortgage. Then, when home values rise, you can decide to sell.
- Make up the difference: If you have the resources, you can make up the difference between what you can sell the house for, and what you still owe.
- Strategic default: For many homeowners, this is the solution of last resort. However, if nothing else works, you always have the option to just walk away.
What do you think? How would handle the situation if you needed to sell your home but were underwater? Leave a comment!
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