A short sale in real estate occurs when the outstanding obligations (remaining home loan mortgage amount) on a property are greater than what the property can be sold for. Short sales are a way for homeowners to avoid foreclosure on their homes and still be able to settle with the lender. A short sale is a better option then foreclosure because foreclosure remains on your credit record for at least 10 years.
A short sales is the best solution for the lender and the borrower in any case which the value of the property is upside down. It is the best chance for the borrower to somehow save his credit and rebuild it later. For the lender it means cash now vs. long after. Also, if lender forecloses on the property and not willing to work out a solution, it is common knowledge that they will net way less once they take back the property.
If your bank agrees to a short sale, you then sell the house for a loss, and with the bank’s blessing, they agree to eat the loss (although they could still demand the homeowner make some kind of payment or share the loss). If you decide to hire an agent to sell the property, you’ll probably need to find a real estate agent willing to work for a smaller commission (which makes the bank a little more willing to absorb the loss). If you sell the property without the assistance of a real estate broker, you will save the amount of the commission and have more to apply toward paying off your loan. Also, be prepared that if your bank does absorb the loss, the IRS might treat that as taxable income and you’ll have to come up with the cash to cover the taxes.
The better option is to find some way to stay in the house—by first, seeing if the lender is willing to restructure the loan, or forgo a couple of monthly payments to help you get back on your feet. You can find more tips on avoiding foreclosure on this page. Adjustable rate mortgage (ARM) borrowers need to be aware there are multiple adjustable rate mortgage relief plans that they can potentially qualify for.
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1 Mortgage Bankers Association Says Lenders Are Helping Avoid Foreclosure | Mortgage Foreclosure & Refinance Resource // Jan 19, 2008 at 5:28 am
[...] In this vein, it’s worth looking at how the industry is helping borrowers. Almost three-quarters of the assists involve a “repayment plan” — basically, an agreement for the borrower to keep making their normal payment, but typically deferring missed payments and penalty fees until the end of the loan. Only about 20 percent of the assists involve a “loan modification,” or a reduction in the actual amount of monthly payments. The balance involves the most drastic available measures — a coordinated sale of the home for less than the outstanding debt. [...]
2 Mortgage Tax Note for 2007 | Mortgage Foreclosure & Refinance Resource // Jan 31, 2008 at 2:15 pm
[...] tax purposes the tax basis of the property has been lowered from its original purchase price. The short sale or deed in lieu may be treated as a “sale or exchange” which triggers income tax on the [...]
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