Short sales is a hot buzz phrase. Some sellers who decide that their home won't sell at the price they had imagined often start to wonder if they should do a short sale. A short sale doesn't always solve problems, but it most assuredly can create problems. Short sales are not the "saving grace" some home sellers would like to believe.
What is a Short Sale?
A
short sale happens when the lender is shorted on a mortgage, meaning the lender
accepts less than the total amount that is due. If your mortgage is $100,000,
but your home is worth, say, $90,000, you are $10,000 short, not including costs
to close the sale such as real estate commissions, recording fees or title and
escrow charges.
Sometimes, to avoid going through the costs of foreclosure, a lender will sanction a short sale by letting a buyer purchase the home for less than the mortgage balance while the home is in pre-foreclosure stage. A pre-foreclosure stage is one of the three stages of foreclosures.
Here are sample steps of a short sale:
- Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval.
- The agent finds a buyer who makes an offer for less than the amount of the mortgage.
- Seller accepts the buyer's purchase offer.
- Seller's lender accepts the buyer's purchase offer.
- Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.
Short Sale Consequences
A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer's offer. If the lender rejects the offer, a short sale will not take place.
-- Tax Consequences If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007. You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.
-- Blemished Credit Report A short sale will show up on your credit report. It's a pre-foreclosure that has been redeemed. Short sales affect credit ratings. While the damage to your credit report may not seem as significantly bad as a foreclosure to you, creditors may not make the distinction. Experts say the drop in your FICO score is identical to a foreclosure reporting.
Always seek legal counsel before attempting to pursue a short sale. A real estate agent cannot give you legal advice.