Authored by Geoff Vaughan in Mortgages
Published on 09-30-2009
If you can no longer afford to pay your mortgage, and the bank is threatening to foreclose your home, you may want to consider a short sale. A short sale occurs when you sell your home for less than what you still owe on the mortgage, and are thus “short” what it would take to pay off the loan. In many cases, the lender will allow the homeowner to sell the house for this amount and will accept it to pay off the mortgage. Short sales have several pros and cons.
One of the biggest pros of a short sale is that you will not go into foreclosure. In a foreclosure situation, the bank or lending institution takes possession of the property. If you can avoid a foreclosure by selling your house first, you will save your credit score over the long term. When you sell your house with a short sale, it still hurts your credit, but not nearly as much as it does when you have a foreclosure on your credit report. In the case of a short sale, only a few late mortgage payments will show up on your report. This can be resolved in 12-24 months, but it can take years to fix damaged credit due to a foreclosure.
Another pro of a short sale is that you may end up getting away with not owing anything after the short sale to the bank. Occasionally, you can convince the bank to completely waive what you owe to them. This is rare in today’s economy, but still can happen. The negative to this is that some banks will still list this amount as earnings on your 1099 for the forgiven debt, so when they file this form with the I.R.S., you will owe money in taxes at the end of the year. It is important to discuss this with an accountant.
One of the biggest cons of a short sale is that it can take months and months to complete. The bank is still the approving authority for the short sale even if a realtor is listing the house. The bank occasionally will look at multiple offers before making a final decision, and this decision could occur after the house has been on the market for so long that it automatically goes into foreclosure. Therefore, you still have a risk that you will foreclose on your home if the process does not occur fast enough for the bank to approve the offers. The fact that so many of these loans do not go through in a timely manner also hurts the seller’s chances for resale because many buyers will not even make an offer on a short sale, knowing how long it will take to complete.
On a positive note for the buyer, a buyer can save thousand of dollars and thereby earn as much as 30% of equity into a house by purchasing a short sale. For this reason, many buyers are motivated to make offers on short sales; these are usually people who are investors, since they can afford to wait months to get a house. People who want to move into a house right away, though, are not likely to want to purchase a short sale. Foreclosures are the better option for the people who want a good deal and want to close faster, since you can close on a foreclosure in 30 days, but short sales usually take months.
Although short sales have many pros and cons, if you are struggling to make your payments and may be at risk for going into foreclosure, a short sale on your house may be the best option. Negotiate with the bank to get the best deal.