Thinking about a short sale? Wondering if it is the right decision for your family? Wondering how it will impact both yours and your family’s future? We have a list of the top 10 questions and answers that will help you make a more educated decision on your present and future.
What is a Short Sale? The easy explanation is that it means to sell a home for less than what is owed on the mortgage.
Why would a lender do a short sale vs Foreclosure? The truth is that the bank does not want your home. They just want the payments to be made or to get as much money back out of the property as possible, so that they can loan that money out again. They are quite simply, all about the money.
What hardships qualify for a short sale? Job loss or layoff, a major medical issue or illness, divorce or spouse leaving, bankruptcy, or if the family has to transfer to another area and simply cannot sell their home or balance the huge burden of paying two mortgages.
How will a short sale impact my credit? Many people in this situation wonder; “How does a short sale affect my credit?” You may know by now that a short sale does negatively affect your credit. To be perfectly honest, the better your credit is right now, the worse it will hurt. Not because you are un credit worthy, but because of the way the credit scoring system is set up.
The part that hurts the most is the 30, 60, 90, 120+ day late payments on your credit report. The short sale itself – when reported to the credit bureaus – is stated as: “settled in full for less than full amount” or some similar jargon. Therefore, these late payments can deduct anywhere between 50 – 250 points from your score, depending on how high it was when you stopped making payments. As soon as the short sale is complete, it stops any further reporting to the bureaus. Your credit score will begin to recover almost immediately. The higher that your credit score was before you started, the quicker it will go up again.
One problem that homeowners have when it comes to repairing their credit and doing a short sale on their homes is that they are usually late on other bills besides just their mortgage. But a bonus of going through the short sale process is the length of time it takes, in which case some homeowners take the chance to catch up on other bills while they are not paying their mortgage during the short sale process.
By controlling their finances positively, the homeowners can effectively wipe out all of their debt much the same as with a bankruptcy, except without the negative repercussions of a bankruptcy. I will add a section on credit repair at the end of this report to coach you on how to get back on your feet and into a new home sooner through credit repair.
What is Deficiency vs. Debt forgiveness? What does this mean to me? When the bank loses money on you from a foreclosure or a short sale, they have a right to file a lawsuit against you. It doesn’t mean that they will. Let’s just say that you decided to let your home just foreclose, rather than trying to use one of the options discussed in loan modifications or short sales. When the home sold at auction for $100,000 less than what was owed on it, what happened to the difference in what was owed and what the home sold for? What happens to that money? Many think that it just goes away. It doesn’t. Whatever the deficiency amount is (in this case, $100k), the bank can either sue you for it, or they can give you what is called ‘forgiveness of debt’. The forgiveness of debt is what you want.
Here is how it works. When the bank writes off the bad debt on its taxes, it is labeled as forgiveness of debt. They bank is required to send you a 1099 for that. If an accountant does not treat it properly, it could be considered taxable income to you. In this scenario, your capital gains tax amount would be roughly $25,000.
There are many misguided people out there – some who have been instructed by untrustworthy sources – to allow a foreclosure on their home so that they don’t have to pay taxes on the loss. This is not accurate. People should understand that they will receive a 1099 either way. At least if you short sale the home, the loss will be less for the homeowner. There are multiple ways that an accountant can classify the 1099 when you get your taxes done to get out of paying taxes on it. (To find out more on this please download my free ebook. If you get nothing more out of this FAQ, I want you to understand this.)
How long before I can buy real estate again? Right now you can buy a home with an FHA loan in as few as 3 years after having a foreclosure, bankruptcy or a short sale (with late payments). However, you can also buy a home with a conventional loan after two years of having a short sale, as long as you have a healthy down payment.
Will a short sale cost me anything? No, a short sale does not cost you any out of pocket money. The bank pays me for the sale of the home.
How long does the short sale process take? The short sale process can take 4-6 months
Can I live in my home during the short sale? Yes, you can live in your home during the short sale process.
Can I do a short sale even if I am current on my mortgage payments? Thankfully, the answer is “NO”; you do not need to be late. Our company has completed many short sales even for a seller who was never late on so much as one mortgage payment. The object of getting a short sale approved is to prove to the bank that there is a hardship.