A short sale is when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy.
A homeowner, who is facing foreclosure, has an existing mortgage of $300,000 and you have a buyer willing to pay $220,000, you would write up a contract between the buyer and the seller, and fax it to the lender. This could be accepted as full payment of the loan.
There Are Other Options
The short sale should be the last resort. But here are other options that their lender can try and offer them before they get to the short sale. However, the banks aren't very helpful and not everyone qualifies.
- Reinstatement - This is the amount that you have to pay to your mortgage company in order to bring your loan current. Your loan delinquency will be taken into account, as well as other unpaid fees and costs associated with your loan.
- Forbearance - During what is called the forbearance period, the lender agrees to accept less than the full amount for a temporary period. This happens only if you show the bank or the mortgage company that you have sources for funds that can let you bring the mortgage current at a future date.
- Note Modification - Although you are unable to settle your previous accounts, the lender might agree to modify your mortgage if you make your regular payment now.
- Repayment Plan - A repayment plan allows you to repay the amount you owe within a fixed period of time, in which your unsettled dues will be combined with your regular monthly payment.
- Reverse Mortgage - Unlike a second mortgage or the ordinary home equity loan, a reverse mortgage is a special kind of home loan where a homeowner's portion of the equity is converted into cash, and the equity that was accumulated over the years can be paid to the homeowner. With the reverse mortgage, repayment isn't necessary until the borrower no longer uses the property as his or her primary residence.
- Sell Your Home - If you opt to sell your home instead, make sure that you choose a real estate agent who is at once professional and trustworthy, who will look out for your best interests.
- Deed in Lieu of Foreclosure - In a deed in lieu of foreclosure, the lender agrees to release the debtor from any liability on the loan itself. This agreement is usually reached only when the debtor transfers his or her property to the name of the lender.
Borrowers should be aware that receiving a short sale from the lender will still have a detrimental effect on their credit standing. Most lenders will report the mortgage as "account settled for less than amount due" or some similar type verbiage. Such a reporting will have a derogatory effect on their credit score and may hamper their ability to get a mortgage loan in the future.
Banks do not like excess inventory and bad loans on their books; therefore, if they see an opportunity where they can get rid of the property without it being a huge loss, they will do it. Lenders know that they could lose a lot more money if it were to go to auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount beforehand and be finished with the headache of it all.
Going through a short sale does have a negative affect on your credit. But it's not as bad as having a foreclosure.
Although "SHORT SALE" is used in real estate lingo to describe a situation where you sell your house for less than you owe, and your lender accepts the lower amount, the IRS does NOT call this situation a SHORT SALE.
(IRS SHORT SALES apply to the Stock Market. It is when you sell "borrowed" shares of stock without owning them, hoping to buy them back at a later time for less, and profit from the decline)
IF your lender approves a property sale for less than you owe, the amount that the lender writes off MAY be reported to you as TAXABLE INCOME. Check with an accountant or IRS BEFORE considering this option.
There is RECOURSE debt, and NON Recourse debt. HUGE difference.
A lender write off of $50,000 means $50,000 may be reported as INCOME TO YOU. IRS calls this CANCELATION OF DEBT. See IRS Publication 544, under FORECLOSURES & REPOSSESSIONS.
Sometimes this is the only way out for a home owner rather than the home going to foreclosure. Chances are you may have to wait a few months before obtaining a mortgage but with today's subprime lenders, just about anyone can get a mortgage.