Homeowners who have the option of completing a short sale in order to avoid foreclosure may be better served by saving their home in this manner. Although there are a few drawbacks of a short sale, it is almost always better just to resolve the mortgage entirely and move on with fewer financial worries.
First of all, when homeowners complete the short sale, they will not have to pay the difference between what they owed originally and what the bank accepts. This counts as forgiven debt and is the main reason for doing the short sale. When property values decline, selling at a high price is almost impossible, and families in foreclosure have no other option for selling their home than to convince the bank to accept less.
However, borrowers may have to pay taxes on the difference, because the IRS treats any forgiven debt as income. But this does not count if the amount forgiven is higher than the market value of the home (when the property is underwater). If a family owes $125,000, but the bank accepts $100,000, and the home is now only worth $100,000, the borrowers will not have to pay taxes on the $25,000 forgiven debt.
The special tax form homeowners will receive from the bank at the end of the year is a 1099, which will list how much income the banks counts that the foreclosure victims received from the short sale and forgiven debt. To determine how to report this to the government, homeowners should talk to their tax preparer about how to count it in income, or read the IRS website for more information on how to treat it.
Another benefit of a short sale is that homeowners can not be sued or have wages garnished by using this method to stop foreclosure. The bank forgives the debt, meaning it is agreeing to release the lien on the house for less than the total amount owed. So the lender is unable from that point to sue the clients for a deficiency on a debt that the bank itself accepted and agreed to a deficiency on.
However, if the property went through a normal foreclosure, the bank may be able to sue the borrowers again after the sheriff sale, depending on the circumstances and the state foreclosure laws. Almost no banks, though, do this, as they figure there is little chance they will be able to collect on any future deficiency judgment against foreclosure victims.
Nor can the bank, as a result of the short sale, put a lien on any other home the borrowers might own. Any part of the debt that is forgiven is no longer owed to the bank -- it accepts the lower amount in return for releasing the lien and not pursuing foreclosure. So homeowners do not even owe the mortgage company any more money once the bank accepts the short sale.
Although banks may not be willing to work enthusiastically with homeowners during a short sale process, persistence pays off. This option will allow more people to escape from a house without the threat of a foreclosure on their credit or the fear of the bank hounding them for a deficiency judgment for years to come. If saving the home some other way is not an option, and market values have declined to make selling difficult, a short sale may be a good compromise for borrowers and lenders.
Many hear about the phrase "real estate short sale" and do not fully grasp what it means. If you read the newspapers, or turn on the TV and the odds are high that you will come across stories about declining real estate market conditions and the increasing willingness of banks and other financial institutions to consider real estate short sales as an alternative to foreclosure. Calling the current real estate market a complete meltdown would not be unfair in some cases, such as in Detroit. Declining real estate markets are the primary reason for the rise in short sale real estate opportunities. The exact definition of a real estate short sale is that it is what occurs when a bank agrees to let a property be sold for less than the amount owed to the financial company. There are two conditions that must be met before a bank is likely to approve this: Firstly: Market values are such that the property's sale price cannot cover the outstanding mortgage balance(s). A complete inability to make the mortgage payments must also be present for the bank to agree to the sale. As an example, suppose a property was purchased five years ago for 217,000 dollars with an adjustable rate mortgage. The owners decided two years later that they needed a second mortgage of 10,000 dollars, bringing their total to 227,000 dollars. Home owners typically have made only a negligible dent in the amount of money that has gone towards paying off their debt in five years. The house might also be in a part of the country where the market values have fallen to a low of 215,000 dollars and their interest rates have gone up from around seven percent to up around eleven percent. Add in the additional problem of one of the owners having lost their job, and you end up with a very likely real estate short sale scenario. A foreclosure costs a lot of money and time delays that the bank may not want to waste, and thus, they might allow a short sale instead. It's better to accept a definite amount of money right away, so that the property can be off the bank's book, than to accept an unknown amount at a distant point in the future. This is generally how a real estate short sale works, though there are other complications that can arise from having owners and lenders not agreeing to the terms of the sale. A real estate short sale is an unpleasant experience for an owner, but it is not the worst thing in the world. The methods may not be flawless, but it will beat having a foreclosure on the credit report. On the positive side, it can represent a great buying opportunity for the smart real estate investor.
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