e have compiled the most frequently asked questions about Short Sales and answered them in a clear and concise way. Questions such as, “Does my home qualify for a Short Sale”, “Will I owe the bank any money afterwards”, and “Will I owe any taxes on the debt forgiven”, are all answered.
Even though Short Sales have been around since the 80’s, many home owners are still unclear what they are and how they work.
A Short Sale is the process through which a mortgage company agrees to settle for less than what is owed to them when you sell your home. They do this as an alternative to the expensive and time consuming process of foreclosure. Each mortgage company has their own set of processes through which they decide whether or not to accept a short sale, and while there are many similarities, each has its own requirements for approval. As one of the most successful real estate companies in New England, we have a distinct advantage in negotiating with your mortgage company. To learn more, read Why Do a Short Sale
– Sell Your Home Quickly and Easily
- For Top Market Value
- Pay Absolutely No Commissions & No Closing Costs
- Avoid Foreclosure & Bankruptcy
- Substantially decrease the negative impact on your credit
- Most likely Walk Away From Your Home With No Debt And No Tax Consequences
If your equity has disappeared, if your interest rate has readjusted higher, if you cannot afford the payments, or even if you just feel it no longer makes sense to own the home, then your house is eligible for a “short sale.”
Most of our short sale clients pay absolutely nothing to sell their home, and walk away owing nothing to their lender(s). They are able to walk away without the stain of a foreclosure or a bankruptcy on their credit, and instead of having to wait up to 7 years to buy another home, they are eligible to borrow money and buy again within the next 24-36 months.
One of the most frequently asked questions when Short Selling a property is the effect it can have on someone’s credit. For many consumers, credit is regarded as the “Holy Grail”, never to be tampered with. Although we have had countless clients whom we have conducted Short Sales for, with little to no credit impact, the expectation should be that most times, a borrower’s credit will be impacted. However, it has much less of an impact to your score compared to a bankruptcy or foreclosure. It is treated by your lender as a “settlement of a debt”, as opposed to a foreclosure or a bankruptcy. Keep in mind, most of the credit impact from a short sale occurs from the delinquencies in your payments. The more current you are on your mortgage, the less your credit is impacted. Remember that credit scores are pretty complex and measure things like total outstanding debt, past or current late payments, number of credit cards, etc. Credit score impact can range from 50 points to well over 200 points, you’re individual case will vary depending on your situation.
The answer is yes and no. Some banks are requiring delinquency while others still do not. Life circumstances such as divorce, disability, relocation, along with many others, may allow you to stay current throughout the Short Sale process.
Short Sales are a different animal than a regular real estate transaction. The amount of time and resources that go into a Short Sale are far greater than a typical sale. Hours on hold, document preparation, and navigating through the maze of bank contacts are just some of the additional steps required to work a Short Sale. Also, you get one shot to do a successful Short Sale. If your agent is inexperienced at Short Sales, makes mistakes, gives up, slacks off, drops the ball, or simply does not know how to negotiate with the banks, you will wind up being foreclosed on by your lender. The majority of agents have never even closed “one” Short Sale in their entire career.
Here’s the good news! Generally speaking, your mortgage company will actually pay our fees (real estate commissions) to assist you with your Short sale. Nearly 95% of our clients have had no out of pocket expenses. The lender pays all closing costs, escrow fees, commissions, etc. The lender may also pay any outstanding property taxes. Occasionally a lender will ask a borrower for some contribution toward closing, but it is definitely the exception.
It is expected that literally millions of Short Sales will take place over the next several years throughout the U.S. There is not one town or city throughout New England that a Short Sale has not happened in due to the continued decline of the economy and housing market.
The primary advantage to doing a Short Sale versus walking away and letting your home go to foreclosure is that in a Short Sale the debt is forgiven and you no longer owe the bank any money. If your home goes to foreclosure, you will still be liable for the deficiency. In addition, if your home goes into foreclosure, your credit will be ruined. Your credit score will likely take a hit by as much as 300-400 points (or more) and you will be hounded day and night by your lender. Even worse, you will have difficulty obtaining credit cards, auto loans or even renting a home or an apartment for the next 7 years.
This will be stated clearly on the bank’s Short Sale approval letter. This approval will state in very clear terms that they are “releasing the lien”, “accepting a short payoff to satisfy the lien”, “reporting the sale as a settled debt to the reporting agencies”, “issuing a full satisfaction of the mortgage”, “not pursuing a deficiency judgment”, or some other variation that states they are settling the debt for less than what they were owed.
Many clients that we do Short Sales for have a first and a second loan, often with 2 different lenders. For the Short Sale to actually close, both lenders have to approve the short sale and agree to settle the debt. It is important to note that both lenders have a vested interest in doing this. The lender with the first loan does not want to foreclose, and therefore is willing to give a little money to the second lender in order to get them to agree to the Short Sale. The second lender will get nothing if the first forecloses, so with the attitude that something is better than nothing, they will agree to take a fraction of what they are owed in order to avoid getting absolutely nothing.
Normally, debt forgiveness results in taxable income. However, under the Mortgage Debt Relief Act of 2007, if the home was your primary residence, you will not owe any federal income tax on the debt forgiven from the sale of your home. If you live in New Hampshire or Rhode Island, no state income tax should apply, since those states conform to the Mortgage Debt Relief Act rules. Currently, Massachusetts does apply a state income tax on the debt forgiven, so you may owe taxes. Talk to your accountant on different tax strategies, like insolvency or including the capital loss of the home to reduce or eliminate the tax owed. Remember, even in a foreclosure you will be taxed, unfortunately it will be for much more since the price will be lower. Visit www.IRS.gov or ask your accountant for more information.
This is a common question, since so many people carry PMI on their mortgage. The answer is NO, it is simply another step in the process that we have to work through for the home to be sold. Honestly, it doesn’t make the transaction easier, but by no stretch of the imagination does it preclude us from performing a Short Sale.