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Short sales are the least understood aspect of the foreclosure process by both homeowners and much of the real estate industry. So what is a short sale and what does it mean to the homeowner who is facing foreclosure?
When you find yourself unable to continue making payments on your home, you will ultimately be forced into the foreclosure process. In Indiana, the foreclosure process can take anywhere from 6-12 months and will end at the Sherriff's Sale. There are many options available for those who are facing foreclosure. In Indiana, there is also a foreclosure helpline @ 1-877-GET-HOPE or you can visit their website.
When there are no alternatives left for refinacing or having your loan modified, a short sale provides the homeowner an opportunity to sell their home for less than what is owed on their home. When the combined cost of selling a home including closing costs and commissions exceeds the homes current market value, you are a candidate for a short sale.
First, let me say, a short sale is not a "get out my house free card" It is an opportunity to avoid foreclosure. It does not come without some consequence, but when compared to the impact of a foreclosure on your credit report, it can be a win-win solution for both the homeowner and the bank.
Banks do not want to own property. They are in the business of loaning money and receiving a return on that money. When a homeowner stops making payments, the bank now has a non-performing asset on their books, which ends up costing them money. How does a short sale help the bank?
There is some paperwork involved in requesting a short sale form your lender. It is generally about the same amount of paperwork you needed when you financed the home.
You must have a legitimate hardship, including but not limited to the following:
You must be finacially insolvent, without liquid cash or assets.
Banks will require your home be listed with a Realtor. Banks want to know you have made every effort to obtain the highest price for your home. A Realtor can best price your home and market it to the largest amount of buyers.
There are some consequences to a short sale. In some cases a lender can pursue a deficiency judgement, which requires the lender to file for such in a court. The lender has the right to pursue a deficiency judgement whether you sell by short sale or if they foreclose on the property.
A lender can also ask for or require a prommisory note for a portion or all of the deficiency. I have had this happen once, but the promissory amount was less than 5% of what the banks loss was on the property. A prommisory note is something which is negotiated before you close, and is not a surprise aferwards. Almost always they are for a small percentage of the actual loss, payable over a long period of time, with zero interest.
Your credit score will typically go down. There is no set range in the reduction of credit score and will depend on your initial credit score, credit history and debt. The major difference between a short sale and a foreclosure is, a foreclosure is a credit item that last forever, a short sale is not.
Possible Tax Consequences - If you do not qualify for the Mortgage Forgiveness Debt Relief Act of 2007, you may have additional tax consequences. Prior to the law which was passed on December 20th, 2007 and is in effect through the end of 2012, forgiveness of debt was a taxable event. The law allows for forgiveness of debt the portion of the loan which was forgiven in a short sale. You should always consult an accountant for advice on how a short sale will affect your personal tax situation.
If you have additional questions or think a short sale may be an option for you, please contact me for a completely private, personal consultation.
As with all legal and financial obligations, you should consult with an attorney, accountant or your personal advisors. One more thing, watch out for people who may not be acting in your best interest.
Know Your Options - Knowing your options can better prepare you for making a good decision for yourself.
What is a short sale? - Short sales are the least understood aspect of the foreclosure process. Find out more about what a short sale is.
Why Use a Realtor - There are many reason to use a Realtor who is well trained in the short sale process.