You’ve fallen behind on your mortgage payments. Worse, your home is now underwater – it’s worth less than you owe. You want to save your credit score, get out of your mortgage, and avoid foreclosure. Is a short sale the answer you’re looking for?
What Is A Short Sale?
A short sale is when you sell your home for less than the amount you owe on it and the lender accepts that amount as payment for the mortgage. It’s a way to get out of the home and away from your mortgage without going through the foreclosure process. A short sale can be a good option if you owe more than your home is worth, especially because if the lender goes through a judicial foreclosure, you could end up losing your home and still owing them money.
How Does A Short Sale Work?
A short sale works much like a sale under any other circumstances, with a couple of key differences. Most importantly, you’ll need the approval of your lender and anyone else who has a lien – a legal right to the property as security for a debt – against your home. If you have just the original mortgage, you only need the approval of that lender. If you have a second mortgage or a home equity loan, you’ll need approval from those lenders as well. This approval is required because their liens won’t be paid in full. Lenders will typically approve short sales when the home is worth less than what you owe and selling it through foreclosure won’t cover the cost of the foreclosure process to the bank.
How Long Does A Short Sale Take?
A short sale takes time – time to find a buyer and then up to several months to get approval from your bank. If you find the right buyer quickly, you may be through with the whole process in just a couple of months. If you have trouble finding a buyer, if the buyer is slow to work with your lender, or if the lender is slow to review the offer, you may need more than a year from listing to closing. Meanwhile, you’ll need to continue to pay your mortgage or the bank may start foreclosure proceedings. In other words, the timing varies widely. If you’re considering this option, you should ask an experienced realtor in your area how long they expect it to take to find a buyer based on the location and condition of your home.
Short Sale Deficiency
In most states, a short sale isn’t necessarily the end of the road. Many allow a lender who has agreed to a short sale to pursue payment of the remaining unpaid balance after a short sale unless they have explicitly agreed not to do so when authorizing the short sale. Fortunately, California is not one of those states. In fact, state law specifically prohibits a lender from pursuing any remaining balance from a homeowner after they’ve agreed to a short sale and the sale has taken place. However, there are certain conditions that must be met to qualify for this protection, so it’s important to make sure you have reliable information before taking any action.
Short Sale Tax Implications
A short sale may have serious tax consequences. First, when a lender writes off some of your debt in a short sale, that may trigger a “cancellation of debt” 1099. For example, if you $150,000 and your lender agreed to a short sale in which they would receive only $100,000, you might get a 1099 for the unpaid $50,000. In other words, you could be required to pay income tax on that canceled debt.
However, there are some exceptions and protections. You should not assume you will have to pay tax on the unpaid balance after a short sale, but you should seek advice from a tax professional before agreeing to the sale.
Similarly, a short sale may in certain circumstances trigger capital gains taxes–even on funds you didn’t actually receive.
How Does A Short Sale Affect Your Credit?
Short sales are often touted as a credit-friendly way to deal with mortgage default. A short sale is still a negative mark on your credit report, but credit reporting agency Experian says the impact can be less serious–especially if you manage to keep your payments up to date until the sale. Like a foreclosure, a short sale will remain on your credit report for 7 years. However, remember that the impact of negative items on your report gets smaller over time, so you’ll be able to improve your score within a couple of years. If you’re hoping to finance another home, you may be able to do so sooner after a short sale than after a foreclosure.
In some cases, your lender won’t even report the forgiven debt to the credit bureaus so you won’t see a serious credit impact at all.
In some cases, your lender won’t even report the forgiven debt to the credit bureaus so you won’t a serious credit impact at all.
What Is The Difference Between Short Sale And Foreclosure?
As mentioned above, a short sale is one alternative to having the bank foreclose on your home. The main difference between short sale and foreclosure is who has control over the sale process. If you’re selling via a short sale, you get to find a buyer and set your terms. You do need approval from your lender, but you’re the one who starts and controls the process.
The bank takes over in order to foreclose. However, the foreclosure process may allow you to stay in your home for several months, effectively rent free, while the bank works through the process. While you can also stay in your home until the completion of a short sale, that process can be disruptive. Be prepared to have prospective buyers looking at the house and to host several open house events. You’ll also need to do more of the legwork yourself – you’ll need to find a realtor with short sale experience and prepare your house for showing. (Contact our office for a referral to a short sale expert).
Remember that these two options are not mutually exclusive. The fact that you are seeking a buyer for a short sale does not stop the bank from moving forward with a foreclosure or legal action. If you get an offer and the bank (and all other necessary parties) approves it before the foreclosure, then you can sell the house. If the bank gets through the foreclosure process before you reach an agreement on a short sale, it will be sold at auction.
If your home does end up in foreclosure, you may want to consider filing a bankruptcy – that stops the foreclosure process temporarily. A Chapter 13 bankruptcy may allow you to catch up past-due mortgage payments over time.
Is A Short Sale Right For Me?
The answer depends on your circumstances. A short sale may be a good option when your mortgage is underwater, you can’t or don’t want to continue making payments, and you can find a willing buyer. It may not be an option at all if you’re already in default.
Before you make a decision, you should consider all of your options. You may be able to offer the bank a deed-in-lieu of foreclosure. You may want to file for bankruptcy. You may want to allow the foreclosure process to proceed. If you’re struggling with your mortgage payments, do some research about what each option offers and requires. Each choice has different pros and cons – talk to one of our experienced attorneys to determine which is best for your unique situation.