A short sale is when a property is sold for less than the amount owed on the mortgage. To put it simply, the seller is “short” of the cash needed to fully repay the lender to satisfy the debt. Short sales have been increased in popularity after the recession in 2007 that hit the US housing market. We’re here to help you understand exactly what is involved in a short sale proceeding.
How does it work?
In a normal short sale scenario, the seller places their property up for sale in the market formally informing any potential buyers that it’s a short sale also known as a subject lender deal. Once a buyer accepts the offer, the seller informs the bank or lender by submitting a financial package including financial statements, hardship letter, and financial records. The lender reviews your application then sends an appraiser to determine the full value of your property. The process doesn’t have much of a difference compared to a normal real estate sales transaction. The main thing that’s different though is the purpose of the sale. Most sellers who undergo a short sale are commonly distressed homeowners, so they’re mostly in very bad situations in dire need of financial help.
Difference between a foreclosure and short sale
Just to be clear, there is a clear difference between the two. In a short sale, the sale is initiated by the homeowner. In a foreclosure, the sale is initiated by the bank. When a homeowner does a short sale, they are getting rid of their unpaid balance due on the mortgage, technically the bank can go after for the shortage, but commonly don’t because of the insolvency of buyer.
What qualifies you for a short sale?
- Decreased market value of the property
A comparative market analysis is done to determine the market value of the property before listing. Houses that share the same features such as square footage, amenities, and current condition are used to compare to your property. With these comparables, the value is determined whether or not your house is on par with the current market standards or not.
- Mortgage in default
If your mortgage payments are current, this doesn’t necessarily mean that you can’t qualify for a short sale. There are many factors that can contribute to a default mortgage like a strategic default for example. This means homeowners have the ability to pay up but chose to default because of high negative equity.
- Financial hardship
This is substantiated with a hardship letter explaining why the seller can’t catch up with their monthly payments or why they can’t pay the difference upon sale. It’s important to consider that there are situations disqualifying you for ‘hardship’ such as bad purchase decisions. Spending money on unnecessary expenditures wouldn’t work well at this point in time and you won’t be able to use that as a justifiable reason on why you fell behind in payments.
Benefits of a short sale
- Credit score benefits
This is where a short sale has the upper hand over a foreclosure. A foreclosure typically stays on a credit report for almost 7 years. This is why home sellers would opt for a short sale rather than a foreclosure since credit scoring firms have a very dim view of someone who went through foreclosure. Without a foreclosure-infested credit score, you have a better chance of purchasing a new home or investment property in the near future.
- Flexibility and Financial Security
In most cases, the seller isn’t required to make any mortgage payments during the short sale. This gives several weeks or months of relief to look for alternative housing and save enough cash to bounce back financially. The seller may even stay in the property until the close of escrow. Comparing this again to a normal foreclosure, the homeowner will be evicted from the property before the process is even finished.
Things to consider before a short sale
- It’s usually time-consuming
Due to the complexity of the sales process, the transaction may take longer than usual since it relies on the approval of the lender. Also, your ability to qualify for a loan will be impacted if you plan on buying a new home after the proceeding. Lenders wouldn’t usually agree to loan you money right away so be prepared to save up.
- Tax consequences
A short sale has a huge chance of giving you a higher tax debt. A relief of debt (the debt is forgiven) may be treated as income for tax purposes. In 2007, the Mortgage Forgiveness Debt Relief Act was enacted to allow homeowners to pay no taxes on debt forgiveness. However, only cancelled debt that’s used to purchase or build a new property or refinance the debt incurred from these purposes will qualify for the tax exemption.
It’s important to enlist the aid of real estate professionals to determine whether a short sale would be the best option or not. Sure enough, our team of experts from SellUsHomes can help you with your decision and stay with you throughout the entire process. To learn more, contact (734) 224-5947 or email us at email@example.com.