In the real estate world, a short sale is just as it sounds. It is the process of a home seller taking less than what is still owed on the mortgage note of the home from a buyer. Of course, the short sale process cannot happen without the approval of the mortgage lending company.
You might wonder why a mortgage lending company would agree to take less from you than what you owe on your mortgage? To make a long story short, mortgage companies often get stuck with foreclosed properties that they have to pay closing costs, auction fees, taxes, repairs and liens on. Since a mortgage company is in the business of making money and lending out money, a foreclosed property makes more of a hassle for them to deal with.
If they have a homeowner that has not paid on a mortgage note for a few months, due to hardship, double mortgages or abandonment of the property, it is likely that property will become a foreclosure. In this case, the bank will have to sit on that property for months, will have to pay repair and auction costs. This means they will essentially lose money on the property.
If a borrower instead comes to them and states that they cannot pay back the full price of the loan, but can pay something close to the cost and the lender agrees to forgive the rest of the loan, this would be considered a short sale. In the world of real estate, short sales are often discussed in conjunction with pre-foreclosure sales.
In the case of a pre-foreclosure sale, a seller is trying to sell of the home in order to avoid the bank foreclosing on their home and having this affect their credit rating. If the seller has tried to sell the house the traditional way, to no avail, they will often take a short sale in order to accomplish getting rid of the loan amount due before foreclosure.
The most commonly cited reason for the mortgage company accepting a pre-foreclosure sale is because of hardship, but they may also consider this option if the home has sat on the market for a long period of time without being able to sell it and the owner is no longer able to make mortgage payments. A mortgage company may be willing to forgive a portion of the loan, but it isn’t likely unless the home has been sitting on the market for a substantial period of time and the homeowner can prove their inability to pay.
Of course there are just a few instances in which a short sale would be an option that the lending company would accept. As well, even if you are close to foreclosure, the lender will have to determine if your less than full payment would be worthwhile. Depending on your lending institution, some will require that you pay off the remaining amount of the loan, while others will require a repossession of other items to make up the difference.
If you come upon a mortgage lending company that is willing to forgive your loan, be sure that you understand the amount given is not totally free. On the contrary, the IRS will consider the amount forgiven as taxable income that will need to be taxed and included in your end of the year tax return report.
Keep in mind that your mortgage lending company can and most likely will make reference to your inability to fully pay off your mortgage on your credit report. This means that your credit report and credit score will likely take a fairly substantial hit from a short sale.
Remember as well that if an investor is only willing to pay you 20-30% less than market value for you home, they should make concessions to take on the property “as is.” This means that you should not have to go through the normal route of negotiating repairs. A pre-foreclosure sale is meant to relieve you of the burden of your home and should not come with added stress.
If you are unsure about a short sale deal someone has approached you about, consider discussing it with a real estate attorney before signing over your home.
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