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A Short Sale May not be the Answer to your Problem

Many homeowners today have found themselves in the position of facing foreclosure when they can no longer pay their mortgage and wondering what they can do to save their long term credit rating. The option that many of these homeowners have turned to is known as a short sale. In a short sale, the home is placed on the market for an asking price that is less that the balance on the mortgage. Provided the lender agrees to this type of deal, the original homeowner is allowed to get out of the mortgage and avoid foreclosure as well as a long term negative hit on their credit rating.

It sounds like an ideal answer to a big problem, but some homeowners may find this solution not as picturesque as it first appears. In theory a short sale would be completely final and the lender would agree to forgive the balance on the mortgage, taking a small loss rather than the more significant loss they would face if the house had to be foreclosed upon. This would allow the homeowner to be relieved of a mortgage they could no longer afford to pay and avoid the rather serious hit that can occur from a foreclosure. As a result, some homeowners make the assumption they can walk away from a short sale, no longer owning the bank and retaining the ability to purchase another more affordable home in the near future.

Theory is not always reality; however. In some instances the lender will instead require the original homeowner to be responsible for at least a portion if not all of the loan deficiency. For instance, if a homeowner is nearing foreclosure and owes $250,000 on their mortgage and sold the home through a short sale for $230,000, the bank might then require the homeowner to be responsible for the remaining $20,000 on the mortgage loan. In any short sale situation the lender must always provide approval to release the homeowner from their obligation. When a homeowner asks the lender for permission to sell for less than what they owe, the lender might agree to provide permission for the sale to take place, but could potentially still come back and try to recoup the remaining balance from the homeowner.

This is why it is imperative that any homeowner who is considering a short sale have legal representation to ensure their best interests are represented in the transaction and that ultimately the bank will not attempt to pursue the homeowner for the loan deficiency. Without that type of protection, the lender has every right to go after the homeowner for the remaining balance, which can ultimately end up being thousands of dollars. The cost of a lawyer in this instance would be well worth the peace of mind and protection and could very well be less than what the homeowner would be responsible for if tagged for the loan balance by the bank.

Homeowners should also understand that even if they do proceed with a short sale that does not necessarily mean they can purchase another home in the near future. While a short sale often does not have the same impact on a credit rating as a foreclosure that does not mean that you can escape completely unscathed. You will be required to state on future credit applications whether you have ever been involved in a deed in lieu of foreclosure. In other words, a short sale. Many lenders are somewhat wary of granting approval for a loan soon after a short sale or a foreclosure. The amount of time that must pass between a short sale and being able to become qualified for a new mortgage varies, but you should not expect it to be within the next few months. Not stating the truth on a credit application can pose serious legal implications.

In addition, homeowners may also wish to consult an experienced tax consultant or tax attorney. If the bank does not go after the homeowner for the remaining loan balance, the homeowner could still potentially be liable for taxes on the balance of the loan. This is because the IRS views the forgiveness of the loan balance as a form of income.

A short sale may very well seem to be a good solution and certainly can be, but only when you make sure you are well informed and have taken steps to ensure that all of your best interests are protected ahead of time.



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