A short sale is a means of selling your residence when the loan balance due to the lender is more than the value of the real estate. In other words, if you sell your residence at fair market value, there will not be sufficient proceeds to pay the mortgage in full. In years gone by this meant that, if you didn’t come up with the balance, “short fall”, out of pocket, the bank would not release the mortgage and you could not convey clear title. You couldn’t sell your home and it would eventually be lost in foreclosure if you couldn’t afford to make your payments.
The economic crisis, that has been lingering for years now, has taken its toll not only on the homeowners, but mortgage companies as well. Banks, in many cases now, will cooperate to allow the short sale. The home owner sells the mortgaged property, for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in exchange for a full release of the mortgage on the land records. In such instances, the lender would have the right to approve or disapprove a proposed sale.
How a Short Sale can help the seller.
Sellers avoid having to go through a costly foreclosure and the full impact that a foreclosure has on their credit score. The seller and the lender negotiate the details of the agreement, but usually sellers who complete a short sale are forgiven the balance of the loan. Sometimes the bank will even offer an incentive to help pay for the cost of moving. If the lender agrees to forgive the shortfall, the seller may avoid bankruptcy, which would otherwise be needed to discharge the balance due to the lender.
Short Sale Are Not Always Perfect
Not all lenders will forgive the balance of the loan. Sellers must understand all of the terms of the short sale agreement before signing anything. A short sale may affect your credit score to some extent, though usually not as much as a foreclosure. There can also be a tax consequence of completing a short sale. The IRS usually taxes any balance that a lender forgives for most debts. However, for a number of
years Congress has been allowing exemptions that may eliminate the tax consequence in short sales of one’s personal residence, at least through the end of 2014. We may not know until the end of this year if Congress will extend the exemption for 2015. Not everyone will qualify, so this is another issue for which you should consult an expert.
Is there more I need to know about short sales?
There is much more to working through a short sale and maximizing your benefits. It is important to get the best advice you can and as soon as possible. There are other options that may also be available, in addition to, or in lieu of short sale. If you need further information about whether you are a candidate for short sale or other programs to work out your financial difficulties, do not hesitate to contact us.