Things to Know About Short Sales
July 25, 2018
A short sale occurs when you are upside down on the mortgage and you want to do something about the property. The goal, in this case, is to eliminate the debt and sell the house at the best price possible. Lenders have an objection because it was your responsibility to pay back the mortgage. Even though the value of your home has declined, you are still liable for loan payments. In this regard, you can request your lender to accept less than the owed amount as the loan payment. Here are a few things you must understand regarding the process:
Your Lender Benefits from the Short Sale
Short sale, deed in lieu of foreclosure and foreclosure are all considered to be the same. To be eligible for a short sale, you must be facing financial hardship, and you must not possess other worthwhile assets. When this happens, you are reaching close to the pre-foreclosure phase. Non-payment of the loan will lead to the foreclosure. Statistics have proved that it costs banks money to foreclose a house. It impacts their lending ability. In fact, holding the home as an REO costs them even more money. Whenever possible, lenders want to get as much money as possible, and if that means approving a short sale, they will do it.
Various Parties are Involved in the Process
The seller cannot alone decide about the sale. Your bank (primary lender) and other lien holders are involved in the process. The mortgage insurance company must approve the deal.
This process is hectic for both buyers and sellers. There is no specified closing date. The lenders can take weeks or months to respond to the request. Clear documentation, knowledge of the short sale process and expert negotiation will help at this stage.
Effect on Your Credit Score
A short sale will reduce your credit score. You can expect your score to go down by 150-200 points. You can buy a house in the next two years after completing a short sale.
Compare this situation to a foreclosure where you cannot buy a house for at least seven years. You’ll see that a short sale is way better than a foreclosure.
Deficiency Judgment After a Foreclosure
In Texas, a lender can pursue a deficiency judgment after a judicial or non-judicial foreclosure. That means, if you lose your home in a foreclosure, you’ll still have to pay the remaining loan balance.
You can change that situation if you get a short sale approval from the lender. The bank can still pursue a deficiency judgment but not if:
- The lien is removed
- The lender writes that your loan has been forgiven or paid in full.
Property Must be Discharged from Bankruptcy
The bank cannot approve a short sale if you are in active bankruptcy. Bankruptcy prevents the lenders from collecting loan payments. To proceed further, your bank must receive any of the following documents from the bankruptcy court:
- Granted motion to sell
- Granted motion for relief from automatic stay with noted short sale negotiations
Tax Implications of a Short Sale
After the sale, your realtor will give you the cancellation of debt form (1099-C). According to the Internal Revenue Service, any forgiven debt is treated as the income. In a short sale, the lender cancels your debts, and you might have to pay tax on the said amount.
You can avoid paying this tax by:
- Recalculating the amount of the forgiven debt and make sure it is correctly reported on the form. You can compare the final HUD-1 statements (both purchase & sale) with the mortgage documents.
- Using the insolvency clause
Please consult a tax attorney for more information.
About the Company:
Habitat Developers LLC is a residential redevelopment firm in McAllen Texas. We buy houses throughout the area. If you are looking to complete a short sale, please give us a call. Our team can negotiate with your lenders on your behalf. Before anything else, you need an offer on the house. We can give you an all-cash offer within 24 hours. An all-cash offer increases your chances of getting approved quickly.