I have been talking to numerous homeowners over the last month that owe more money on their mortgage than it is currently worth in their particular neighborhood. This is an opportunity for a short sale. The definition of a short sale is when a property is sold and the lender agrees to accept a discounted payoff. This means that the lender will accept as payment in full less money than is currently owed on the property. One example of this would be if the unpaid balance is $100K and the property sells for $75,000. The lender would then agree to accept the $75,000 as payment in full.
Here are four short sale tips:
- Prove that you are unable to continue paying on your mortgage. The lender will need documentation such as a current appraisal, a budget or balance sheet showing your financial situation, and recent comparable sales data for homes in your neighborhood. Make sure this is a very strong argument so the lender will agree to do a short sale and forgive part of what they are owed. Also remember that all lien holders will need to sign off on a short sale. This includes any lenders that may be holding a home equity line of credit.
- Be careful or you may still be subject to judgments and taxes. The lender may still sue for any outstanding balances. Always negotiate the terms of the debt forgiveness in writing with the help of a qualified real estate attorney. Note that the IRS views forgiven debt as ordinary taxable income. You will be required to pay taxes on the amount of debt that the lender forgives. This could amount to a very large tax bill on April 15th.
- A short sale is easier on your credit score. You have worked long and hard to get a good credit score and keep it good. A short sale is still going to affect your credit. Depending on how far behind in payments you are it could be anywhere from 100 points to 200 points. However, most lenders will not lend for five years after a foreclosure and two years after a short sale. This will also affect other areas of your life. Many companies check credit scores including: hiring managers, cell phone companies, and utilities.
- Just remember that lenders DO NOT want to foreclose. It is expensive for everyone involved. Oftentimes the lender is just as motivated as the homeowner to avoid foreclosure. They do not want to be the landlord, real estate agent, and property manager on any properties.
If you do your homework ahead of time and work diligently with the bank a settlement can be reached that will benefit everyone and may even preserve a little of that hard-earned credit score.
