A short sale occurs when the lender with the mortgage on your home will accept a payoff for less than what is owed.
The transaction is between a seller and a buyer, conditionally with the lender’s approval who holds the mortgage/loan securing the property. A short sale is one option that can be used to stop foreclosure. You need not be behind in your mortgage payments, but must be in eminent risk of default. There can be many reason for default or risk of default, divorce, loss of job, transfer, medical bills, etc.
Benefits of a Short Sale
- A short sale is advisable to keep a foreclosure from stigmatizing your credit report. A foreclosure will stay on your credit report for up to 10 years or more. A short sale is typically not reported on a credit report or required on future loan applications.
- A short sale typically releases the homeowner of the debt, provided the lender waives the deficiency. A deficiency is the difference between what the property sells for and the amount of the loan. Negotiating with the lender to waive any deficiency is an important element in negotiating with the lender.
- A short Short selling saves time and money for the lender who would otherwise foreclosure, evict and take possession of a property in unknown condition. Lenders are not in the business of owning real estate. As a result, they are usually motivated to negotiate, within reason.
- A short sale allows you to make the best out of a bad situation.
Downsides of a Short Sale
- A short sale may be reported as a charge off, meaning the debt is unlikely to be collected. The charge off may result will weigh negatively on your credit report, at least temporarily.
- After a short sale, you may pay a higher interest rate for credit on a home loan, car loan, or credit cards.
- There may be tax consequences if the property is not owner occupied (if you are not living in the home). The 2007 Mortgage Debt Forgiveness Relief Act \does not cover homes that have been refinanced to take cash out for other expenses, second homes, vacation homes, or rentals. We suggest that you consult your tax accountant for more information relating to tax consequences of a short sale.
- Lenders may require you to pay a settlement fee or sign a promissory note to offset their loss as a condition of accepting the short sale.