A Short Sale is simply a sale of real estate by a seller to a third party buyer in the which the selling price is insufficient to pay off all of the seller's loans, liens and closing costs. As a result, the seller's Realtor petitions the seller's lender or lenders to reduce their loan payoff balance in an amount sufficient for the seller pay all closing costs and close escrow.
If you are at risk of defaulting on your mortgage there are no disadvantages to attempting a Short Sale and if the Short Sale is successful there are many benefits:
Short Sale
Foreclosure
Credit Score
Typically lowers credit score as little as 50 points.
Typically lowers credit score 200-300 points.
Credit History
Reported as Settled, or
Paid – less than owed.
Foreclosure will remain as a public record on a person's credit history for 10 years or more.
Eligibility for loans
A homeowner or investor who successfully negotiates and closes a Short Sale will be eligible for a Fannie Mae backed mortgage after only 2 years.
A Homeowner or investor who allows a property to go into Foreclosure is not eligible for a Fannie Mae backed mortgage for a minimum period of 5 years (residence) and 7 years (investment).
Deficiency Judgments
In a Short Sale, many lenders agree to waive their right to pursue deficiency judgments. In cases where they don’t, the deficiency amount can often be negotiated to a lower amount.
In almost all cases, the lender has the right to pursue a deficiency judgment against the homeowner to recover any financial loss the lender incurred from the foreclosure.
A deficiency judgment is a court order that a lender may obtain after the lender has foreclosed on a mortgaged home but receives less at a foreclosure sale than the outstanding balance of the mortgage. For example: If the total amount due on a mortgage is $400,000 and the lender gets only $300,000 at the foreclosure sale, the lender generally can then seek a deficiency judgment from a court against the borrower for the $100,000 difference. In the case of a Short Sale, this deficiency may be forgiven, or negotiated to a lower amount.
Call your lender and ask to speak with their Loan Workout or Loss Mitigation Department. Depending on your unique situation, they might offer you a repayment plan on the past due amount, or they may qualify you for a Loan Modification designed to make your payments more affordable. If those efforts fail, a Short Sale is likely your best option. Call us for more suggestions on dealing with your lender.
Prior to the Mortgage Debt Relief and Emergency Economic Stabilization Act of 2008 being put into effect, money forgiven by a lender in a short sale was considered taxable income. In many circumstances, the new law no longer requires taxpayers to pay federal income tax on their forgiven debt, provided the property is their principal residence. You should talk with a tax accountant for further details.
If you have other questions about Short Sales, or any other real estate topic, please contact us
