Most homeowners facing foreclosure usually try to sell their home. The depressed housing market makes it almost impossible to sell their home at market value. Many homeowners reduce the sale price before they were able to find a buyer and ending up in some cases selling their home for less than what they owe the mortgage company.
What is a short sale?
This is what mortgage companies call a “short sell” which has become quite common. This is where the mortgage company accepts less than what is owed to them by the homeowner. Foreclosing on a home is more costly for the lender and can take up several years. The mortgage company will make more money on a “short sale” than on a foreclosure.
What is involved in a short sale?
You could find yourself facing foreclosure and having to sell your house for less than what you owe, but here is what you need to do first.
- Make sure you have exhausted all other possibilities.
- Contact your mortgage company and keep them abreast of what is happening.
- Your mortgage company will have a department that handles short sales, so make sure they know that is what you are inquiring about.
- You will be required to fax them financial information including income tax returns and bank statements.
- They will want a letter of explanation as to why you are in this financial situation.
- They will need the name of your realtor if you have one.
This is what I had to do in 2007 when I lost my income. My mortgage company approved me for a short sale of $4000 less than what was owed to them. The mortgage companies do have a limit on the amount of the shortage that is acceptable. They also issued a 1099 tax form (after the closing) showing this $4000 as added income and I would be responsible for paying income tax on it
How will a short sell affect your taxes?
With so many homeowners turning to short sales to prevent foreclosure, the IRS, in December 2007, granted them an income tax relief. The homeowner just needed to fill out a 982 form and file it with their income tax return. This was a big help to the homeowners owing thousands of dollars in income tax on these short sales. This tax relief was for only primary homes, not secondary homes.
Will a short sell affect your credit?
The mortgage company is writing off the amount of the short sale because you could not meet your original obligation to pay it. This will show up negatively on your credit report. This could lower your credit score anywhere from 200 to 300 points according to source on about.com. It is still better to do a short sale than to foreclose on your home. Foreclosure can take years to repair, whereas a short sale, the recovery is a lot faster. You are not going to walk away from a short sale unscathed.
Will a short sale prevent foreclosure?
A short sale is an alternative to foreclosure. Your property will get sold for less than what you owe, but the lender will not have auction the property to try to recover some their money. The closing procedure is no different than a standard closing. The short sale will prevent foreclosure.
Useful Resources:
- www.mortgagenewsdaily.com - has a lot of good information on real estate and on short sales
- www.homebuying.about.com - has a lot of good information from selling to buying homes along with short sale and foreclosure information.
- www.irs.gov - has all the tax information and forms needed to file after a short sale
