Short Selling Your Home
Having trouble paying your mortgage? Lender won’t modify your loan? You could be among the ten million plus home owners whose mortgage is "underwater". That means you owe more on the mortgage than your home is worth. Well, it's not as bleak as you may think. Negotiating a short sale with the lender could be a fairly painless remedy for your mortgage distress.
What is a Short Sale?
A short sale is a transaction in which the net proceeds from the sale are not enough to cover the sellers' mortgage pay-off, closing costs and fees. In this situation, due to negative
equity in the property, the seller receives no proceeds from the sale.
Because the lender (in some cases two lenders are involved) is taking a loss on the loan, the lender needs to approve the price and terms of the sale, effectively making the lender the
controlling third party to the transaction. Once the lender agrees to a short sale, the distressed homeowner lists the property with a REALTOR® for sale at or slightly below market value.
The lender agrees to accept the proceeds as payment in full for the mortgage even though the sales price is less than the payoff, closing costs and fees. The lender “forgives” the deficiency amount, the seller is unburdened of the mortgage and the buyer gets, in most cases, a good buy. The entire process should take about 45 to 60 days, but not always so patience is required.
Sounds simple enough, right? Not quite, but a short sale is better than a foreclosure so here are some things you need to know.
A Short Sale Will Not Save Your Credit Score
Saving your credit score may be the most compelling reason for choosing to short sale your home rather than letting it go to foreclosure sale, but the reality is that a short sale is not much better for your credit score than a foreclosure. A short sale, deed-in-lieu-of-foreclosure and a foreclosure are all accounts "not paid as agreed". Such accounts are considered the same for purposes of your credit score.
Short Sales Don't Always Cancel the Remaining Debt on the Mortgage
A short sale does not automatically cancel your obligation to pay off the deficiency (the remaining balance of the debt) amount from your mortgage. There are two parts to your mortgage. The first part consists of your promise to repay the loan. The second part secures the loan by placing a lien on the property. So, when a lender approves a short sale, what
is the lender agreeing to do? The lender is agreeing to release the lien on the property as it would virtually impossible to sell a property without this lien release.
But is the lender also agreeing to cancel the seller's obligation to pay the loan in full? Not necessarily.
Some lenders ask sellers to sign new, unsecured promissory notes before approving the short sale. Other lenders, without asking for new promissory notes, reserve their right to collect the deficiency within the fine print of their short sale approval documents. To be certain that you have no post closing financial obligation to the lender, get the waiver of deficiency in writing and included in the closing package. Often, an attorney is part of this process.
You May Owe Taxes on the Deficiency
Normally, the tax code treats forgiven debt as taxable income but, under the recently renewed Mortgage Forgiveness Debt Relief Act, mortgage debt forgiven by lenders will not be taxable if the discharged debt is on the borrower’s principal residence. The amount of debt forgiven must be reported on your income tax return. You should receive form 1099-C from your lender stating this amount. It’s in your best interests to have a tax accountant prepare your return following the sale to be sure all points are covered.
Hire a REALTOR® with Short Sale Experience
Short sales are complicated, time consuming and leave little room for error.
Banks can be difficult to work with, are known to engage in questionable practices and only do that which benefits their bottom line.
Keep in mind, your lender is not your friend.
Use my knowledge and experience to your advantage and have a successful closing.