DROdio Real Estate

So you’ve read about short sales, and you’re pretty sure it’s the best way to avoid foreclosure on your home. Still, before you decide to go forward with a short sale, here are a few things to keep in mind:

• You’re not necessarily eligible. Even if you’ve discovered that you now owe more on your mortgage than your house is worth and due to other factors, you won’t be able to keep up with the payments in the near future, your bank may not approve you for a short sale. In fact, as long as you’re current on your payments, many banks are unlikely to accept one. Why would they? Banks accept short sales because the loss they cause is usually smaller than the cost of foreclosure. If you’re current on your payments, the bank may not see you as a foreclosure risk quite yet. To be clear, we are not advocating that you default on your mortgage – if you do so, your credit rating will suffer. But before the bank will accept a short sale, you need to convince them you will be unable to pay back your loan. Still, if you’re interested in a short sale, call your bank right away – you might be able to convince them to agree to a short sale, even if you are current on your loan.
• Short sales hurt your credit rating. When you sell your home short, the bank that holds your mortgage is accepting less money than you owe them and writing off the difference. According to Maxine Sweet, credit bureau Experian’s vice president of public education, banks will report this arrangement as “settled” rather than “paid.” This has a sharply negative effect on your credit rating. Nevertheless, it ends the cycle of default and late payments – if you remain in default until your bank forecloses on you, you can’t begin rebuilding your credit until you’ve emerged from the process. With a short sale, your credit may be harmed, but you can begin repairing it immediately. You can read Sweet’s complete article on short sales at http://www.experian.com/ask_max/max051408a.html
• Short sales can take a long time. If your situation has come to a short sale, you likely want to get it over with in a hurry. But since your bank is writing off part of the loan’s value, they get a say over which offers you can and cannot accept. If they think your prospective buyer is making a lowball offer, the bank has the right to reject it and force you to wait for a higher offer. Even if they ultimately decide to accept an offer, it may take as many as several weeks before they respond to an offer you have passed along to them. All that time, you remain in default and can’t move on.
• You may not be done. Even after you complete a short sale, your home-owning headaches may not disappear. Your bank may take you to court seeking a deficiency judgment for the remainder of the loan. For example, if your mortgage was for $300,000 and you sold the house for $250,000, the bank could try to recoup the remaining $50,000 plus expenses. This, however, is unlikely to happen to you. Banks usually recognize that paying lawyers to pursue legal action against people who have little money is ineffective and thus generally won’t seek a deficiency judgment. Nevertheless, you should involve counsel if necessary, and you should make sure your bank won’t pursue one.

One thing you no longer need to worry about is paying taxes on the amount forgiven. In the past, the amount of your loan forgiven was considered income and taxed. Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, debt forgiven in a short sale of your home is tax-free in 2008 and 2009.

The above isn’t meant to dissuade you from a short sale. They can be a valuable tool to escape foreclosure and begin rebuilding your credit. They do have several drawbacks, however, and we encourage you to discuss the idea with your realtor and lawyer.

Share This

Let's Meet for Coffee

Discuss your homebuying strategy with our owner
over coffee.   Get more details here.

This entry was posted on Monday, May 26th, 2008 at 12:32 pm and was filed under All the questions you were afraid to ask, The Selling Process, drodio.com. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.