What happens if i short sale

A short sale might be able to help you preserve your credit to some degree by helping you avoid a foreclosure on your record. A short sale can take as little as a few weeks or as long as several months. Because short sales are complicated transactions, they tend to be more time-consuming. Plus, the original lender needs to review the short sale offer to determine whether they will accept it.

If the lender believes they can make more money by going through the foreclosure process, they might not accept the short sale proposal. You can reduce the time it takes by working with a real estate agent that has experience with short sale transactions. A short sale is one real estate deal where you really need to get help from an experienced agent or attorney. Not all real estate agents know how to handle a short sale, so make sure you consult with one who can demonstrate special training and a good track record.

Having a real estate agent on your side who knows how short sales work — and who has negotiated others — will increase the chances of closing the deal. Because of the complexity involved in the transaction, short sales fall through relatively often. However, you can reduce the chance of that happening by making sure the following items are available:.

The sadder the story, the better. If the seller has money in the bank, including retirement funds, it is unlikely that the lender will let the debt slide. The proof of income and assets must include income tax and bank statements going back at least two years. Sometimes sellers are unwilling to produce these documents because they conflict with information on the original loan application, which may not be completely accurate.

The analysis should include a list of comparable properties on the market, and a list of properties that have sold in the past six months or have been on the market in that time frame and are about to close. There may be more than one, so determine how many liens are on the property.

The good news is that since late , the IRS has been willing to release a federal tax lien. The IRS is not forgiving the back taxes that homeowners owe; it is just no longer requiring that the lien be paid off before the property can be sold. A single mortgage lien is an easy problem to solve. Here are some things to keep in mind:. First, try to determine how much is owed on the house in relation to its approximate value.

Pass on those in which the owner has a lot of equity in the home — the lender likely will prefer to foreclose and resell closer to the market price. What is the property worth? Ask the seller or the agent what liens are on the property, and which lender is the primary lien holder.

Confirm this information through a title search before closing the deal to make sure there are no undisclosed liens on the property.

This is critical. Since they already have a lot of your information in the short sale paperwork, they may be able to expedite the loan application process. Once an agreement is worked out, it is common the lender will require closing in as few as 20 days.

This is too late to start shopping for a mortgage. Finding the decision-maker can be one of the biggest initial challenges. You will first need to have the homeowner complete and sign an authorization letter notarization is usually required , which gives the lender permission to discuss the mortgage situation with you.

Many lenders have an application specifically for a short sale request. The proposal generally consists of a package of materials including the application and authorization letter, plus:. The mortgage or deed of trust creates a lien on your property. In other words, if you break your promise to repay, the lender has the right to have the property sold to pay off the loan.

So, when a lender approves a short sale, what is the lender agreeing to do? At the very least, the lender agrees to remove or release the lien from the property. But is the lender also agreeing to cancel the borrower's obligation to repay the loan in full? Not necessarily. Some lenders even ask borrowers to sign new, unsecured promissory notes before approving short sales. Other lenders, without asking for a new promissory note, reserve their right to collect the deficiency as part of a short sale agreement.

After the short sale closes, the lender starts collection proceedings. Other lenders assign the debts to collection agencies, which then go after the borrowers for repayment after short sales. To be sure that you won't be on the hook to pay any more money after your short sale closes, ask your lender to waive the deficiency and get it in writing. If your lender refuses to forgive the deficiency, consider talking to an attorney to see if any state laws prohibit your lender from collecting the deficiency.

Again, in a couple of states, you can't be sued for a deficiency after a short sale. Preserving your credit score might be the most touted reason for choosing a short sale of your home rather than letting it go through a foreclosure sale. But the reality is that a short sale isn't much better for your credit score than a foreclosure.

Short sales, foreclosures, and deeds in lieu of foreclosure are all about the same for purposes of your credit score. Only bankruptcy is worse for your credit. Exactly how much your score will drop depends primarily on what information the servicer reports about the short sale and your credit history. If you have a high credit score before a short sale, which is unlikely if you're behind in mortgage payments, you'll lose more points than someone with a low credit score. And if you avoid owing a deficiency, your credit score might not take as big of a hit.

Overall, though, the difference in how much a short sale or foreclosure affects your credit is pretty minimal. A short sale might generate an unwelcome surprise if the lender forgives all or part of the deficiency: taxable income. Although the concept isn't intuitive, the IRS treats forgiven debt as taxable income, subject to regular income tax. Thanks to the Mortgage Forgiveness Debt Relief Act of , though, most homeowners who have had mortgage debt forgiven before January 1, , won't owe taxes on it.

The exclusion created by this law applies to debts forgiven as the result of a written agreement entered into before January 1, , even if the actual discharge happens later. To qualify for the exclusion, t he forgiven debt must have been incurred to purchase, build, or make significant renovations to your principal residence.

But if you borrowed against your principal residence and used the money for any purpose other than acquiring or improving that property, you might owe taxes on the forgiven amount. For example, if you used the loan to buy a second house, to pay college tuition for a child, or to take a vacation, and you end up not paying it back in full, the amount your lender writes off typically whatever amount wasn't paid back is considered forgiven debt.

If you face this situation and can prove you were legally insolvent at the time of the short sale, you won't have to pay the tax. Insolvency is when your total debts are more than the value of your total equity in your real estate and personal property. You can also get rid of this kind of tax liability by filing for Chapter 7 or Chapter 13 bankruptcy if you file before escrow closes. Of course, if you're going to file for bankruptcy anyway, there isn't much point in doing a short sale because the bankruptcy will negate any benefit the short sale has on your credit rating.

A short sale can take a long time and a lot of work, with no guarantee that it'll close in the end. Before embarking on a short sale, you might want to contact your servicer about other ways you might avoid a foreclosure, like by modifying your loan or getting a deed in lieu of foreclosure.

Like short sales, these alternatives have drawbacks and benefits to consider before proceeding. An approved agreement for a short sale transaction might include a marketing or listing period during which the borrower may market the property, and the lender won't foreclose. If you don't have an approved short sale transaction by the end of the marketing or listing period, the lender can generally go forward with the foreclosure. This part of the mortgage is waived in a short sale.

The second part of the mortgage is the promise to repay. Lenders can still enforce this portion either through a new note or the collection of the deficiency. Whatever happens, lenders must approve the short sale, which means borrowers are sometimes at their whim. Short sales and foreclosures are two financial options available to homeowners who are behind on their mortgage payments, who have a home that is underwater , or both.

In both cases, the owner is forced to part with the home, but the timeline and consequences are different. A foreclosure is the act of the lender seizing the home after the borrower fails to make payments. Foreclosure is the last option for the lender. Unlike a short sale, foreclosures are only initiated by lenders.

The lender moves against the delinquent borrower to force the sale of a home, hoping to make good on its initial investment of the mortgage.

Also, unlike most short sales, many foreclosures take place after the homeowner abandons the home. If the occupants are still in the home, they are evicted by the lender.

Once the lender has access to the home, it orders an appraisal and proceeds with trying to sell it. Foreclosures do not normally take as long to complete as a short sale, because the lender wants to liquidate the asset quickly.

Foreclosed homes may also be auctioned off at a trustee sale, where buyers bid on homes in a public process. A homeowner who has gone through a short sale may, with certain restrictions, be eligible to purchase another home immediately. Depending on the circumstances, homeowners who experience foreclosure can expect to wait two to seven years to purchase another home.

While a foreclosure essentially lets you walk away from your home—albeit with grave consequences for your financial future, such as having to declare bankruptcy and destroying your credit—completing a short sale is labor-intensive. However, the payoff for the extra work involved in a short sale may be worth it. Less disruptive alternatives to a short sale include loan modification and utilizing private mortgage insurance.

Before resigning yourself to a short sale, 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 and get back on your feet. Another possible option for staying in your home arises if you have private mortgage insurance PMI.

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. The source of the financial trouble should be new, such as a health problem, the loss of a job, or a divorce, rather than something that was not disclosed when the homebuyer originally applied for the loan.

However, if you feel you were a victim of predatory lending practices, you may be able to talk the lender into a short sale even if you have not had any major financial catastrophes since purchasing the home. To put yourself in a more convincing position to complete a short sale, stop purchasing non-necessities. Be aware of other circumstances that may prevent the approval of a short sale.

If the lender thinks it can get more money from foreclosing on your home than from allowing a short sale, it may not allow one. If someone cosigned the mortgage, the lender may hold that person responsible for payment rather than doing a short sale.

If you think your situation is ripe for a short sale, talk to a decision-maker at the bank about the possibility of engaging in this type of transaction. At this point, you should consult an attorney, a tax professional, and a real estate agent. While these are 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.

You may be able to pay for these service fees out of the sale proceeds from your home. Professionals accustomed to dealing with short-sale transactions will be able to give you guidance on how to pay them.

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.

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 a 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. Along with the documentation of your distressed financial status, your proposal should include a hardship letter explaining the circumstances that are preventing you from making your mortgage payments. You want to make it as convincing as possible and protect your interests while also appealing to the bank.

Be careful about submitting your financial information to a lender because, if it does not approve the short sale, it may use your financial information to try to get money out of you in foreclosure proceedings.

If you still have cash assets , you may be expected to use them to continue making mortgage payments or to make up some of the shortfalls between the sale price and the mortgage amount. An attorney experienced in completing short sales can help you navigate the details. 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. If the short-sale transaction goes through, consult with the Internal Revenue Service IRS to see if you will have to pay taxes on the shortfall. Also, be aware that a short sale can still affect your credit score in the sense that the months of mortgage payments you missed prior to the short sale can show up as delinquent payments on your credit report.

Your bank may be more likely to be generous in this regard if you brought up your hardship before you were significantly behind. For credit purposes, while this is somewhat damaging, it is certainly less damaging than a foreclosure. Short sales can also provide excellent opportunities for buyers to get into houses at a reduced price. Here are a couple of tips to help you make smart decisions when considering the purchase of a short-sale property. Most short-sale properties are listed by real estate agents and on real estate websites.

Some listings may not be advertised as short sales, so you might have to look for clues within the listing, such as being subject to bank approval or giving the bank time to respond. An experienced real estate agent can make a big difference in terms of both finding and closing short-sale properties. Holders of this certification have received specialized training in short sales and foreclosures, qualifying sellers for short sales, negotiating with lenders, and protecting buyers. Realize in advance that short sales are complicated, time-consuming transactions.

It can take weeks or months for a lender to approve a short sale and many buyers who submit an offer end up canceling because the short-sale process takes too long. Rules for short-sale transactions vary from state to state, but the steps normally include:.

If you are buying a house in a short sale with the intention of flipping it, the key to a profitable transaction is a good purchase price. In real estate investing , it is said that the money is made in the buy.