Will a Short Sale Save My House?
A short sale is what happens when a home-owner in financial trouble sells their property for less than what they still owe on their mortgage. The buyer of the property is a 3rd party (meaning, not the bank), and all proceeds from the sale go to the lender. The lender either forgives the difference, or they get a deficiency judgment against the borrower forcing the owner to pay the lender all or part of the difference between the sale price and the original value of the mortgage. In some states, this difference must legally be forgiven in a short sale. Read: Can I Buy a Home After a Short Sale or Foreclosure?
Before doing a short sale, you should certainly talk to your lender about the possibility of a revised payment plan or loan modification. One of these options might allow you to stay in your home while you recover your financial condition. Another possible option for staying in your home arises if you have private mortgage insurance (PMI). Many homeowners who purchase homes with less than 20% down are required to purchase PMI with their houses. If the PMI company thinks you have a chance at recovering from your current financial situation, it may advance funds to your lender to bring your payments up to date. Eventually, you’ll have to repay the advance. See: Home Buying: Can I Buy My Own House at a Short Sale?
At this point, you should consult an attorney, a tax professional, and a real estate agent. While you’re probably thinking that the last thing you can afford is to pay for these high-priced professional services, if you make a mistake by trying to handle a complex short sale transaction yourself, you may find yourself in even bigger financial trouble. If you’re already broke, perhaps you can pay these service fees out of the sale proceeds from your home.
When setting an asking price, make sure to factor the cost of selling the property into the total amount of money you need to get out of the situation. Of course, you want to sell the home for as close to the value of your mortgage as possible, but in a down market, there is bound to be a shortfall. In some states, even after a short sale, the bank will expect you to pay back all or part of that shortfall, but at least this amount will be significantly less than what you owed when you had a mortgage. For further reading, see: Fearing Foreclosure? A Short Sale Can Help
Gather all of the documents you’ll need to prove your financial hardship to the lender. These may include bank statements, medical bills, pay stubs, a termination notice from your former job or a divorce decree. It is up to you to come up with the short sale proposal. Be aware that the lender ultimately must approve a short sale after receiving all the details because the lender is the recipient of the proceeds. Your job is to find a buyer for your home.
Because short sales can take longer than regular home sales due to the need for lender approval, they often fall through. The buyer may find another property while waiting for an answer from you. Be prepared for this possibility.
Great article, but still a little confused. Will having a short sale on my house work?
Bear in mind that a short scale can really hurt your credit. It also doesn’t always cancel the remaining debt on the mortgage, and you may owe taxes on the deficiency. If your lender forgives you for a deficiency after a short sale, you may owe taxes on the forgiven amount. That’s because it’s considered income by the IRS, upon which you may owe federal and state income tax.