Is a Short Sale Right for You?
Many homeowners today are definitely feeling the pinch of a recession
and a housing market that has yet to rebound in most areas. For many
such homeowners the difficulty of the situation is only made worse by
the fact that they are in default to the bank and sometimes owe more
money on their mortgage loan than the home is worth. In such situations,
a short sale may be a viable option that should be considered.
A short sale is a type of transaction that allows you to sell your home
for less than the amount that you owe on the mortgage. In this case the
lender may accept the sales amount as payment in full for the mortgage.
If the lender agrees to the sale, you usually will not be held liable
for the difference or deficiency between the sales amount and the loan
balance, but that is not always the case.
There are a few things that should be considered if you find yourself in
this type of situation and you think that a short sale may be the right
option for you. First, you should know that in most instances banks will
only approve a short sale on a primary residence, not a secondary
residence. Second, a short sale will usually only be approved if you are
not able to make payments on your mortgage loan. You must usually be
able to demonstrate a true hardship and that you are insolvent. If you
have other assets that would allow you to meet the requirements of your
mortgage loan, the bank will generally insist that you use those other
assets to pay your mortgage.
In addition, you should understand that there is the possibility that
you may owe the difference between the net sales price of the home and
the total balance for your mortgage loan; including all penalties and
late fees. If the bank requires this, it is known as a deficiency
judgment. Many banks today are now turning over deficiency judgments to
collection agencies. In the event that you happen to have a second
mortgage, it is almost certain that the bank will insist upon full
repayment. Depending upon the difference between the sales amount and
the loan balance, you could still find yourself owing the bank a
significant amount of money even after the property has been sold.
There are also possible tax implications associated with a short sale
that you should be aware of. In the event that the home is not your
primary residence, you may be responsible for paying taxes on the
deficiency amount between the sales price and the loan balance. To make
sure you understand the full implications that such a tax situation
could impose, it is a good idea to consult a CPA or tax attorney who can
help you to understand all of the options that are available to you. In
some cases, depending upon your situation, it might be better for you to
consider foreclosure or even bankruptcy. Everyone's situation is unique
and different, so never assume that a particular path is automatically
the most beneficial.
It should also be understood that even if you are able to work out a
short sale, your credit will still likely be impacted negatively. It
could even reduce your credit score by as much as 80 to 200 points. This means
that it could be several years before you will be able to obtain another
mortgage loan. Nevertheless, it is still better than going the foreclosure route
which can potentially lower your credit score by 250 - 300+ points for a
total of seven years.
While these are certainly serious consequences, there are also some
advantages to going ahead with a short sale. Depending upon the
situation, a short sale could actually damage your credit less than a
foreclosure. As a result, you may be able to buy another house sooner,
provided that you maintain stable finances in the future. The bank can
also benefit from a short sale by being able to recoup the proceeds from
the loan sooner than they would if they allow the home to go into
foreclosure.
There are certainly many important elements that should be fully
considered before proceeding with a short sale. If you are 'upside down'
on your mortgage loan and the bank is willing to agree to a short sale
it very well could be worth it to consider it, but only after you have
investigated all of your options and make sure you fully understand all
of the possible consequences.
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