What is becoming more commonplace, financially troubled homeowners who owe more than their homes are worth are trying a so-called ‘’short sale” as an alternative to foreclosure. In a short sale the lender agrees to accept less than the homeowner owes on a mortgage.
Last year, the National Association of Realtors estimates there were 500,000 short sales, about 10 percent of all sales. Still, there is a great deal of confusion and misinformation surrounding short sales, particularly regarding credit scores.
A short sale can hurt a borrower’s credit score as badly as a foreclosure, but won’t last as long. The blemish from a short sale depends, in part, on how the lender reports the sale to the credit rating agencies, Experian, Equifax and TransUnion. Occasionally, a lender will agree to report the loan as ”paid,” which according to Experian would not negatively impact credit scores.
”Short sales are reported as either a charge off or a settlement.
An individual’s credit score is one factor that determines whether or not they qualify for a loan or a mortgage. Credit scores (often referred to as FICO scores) also determine the interest rate a borrower pays on credit cards as well as any type of a loan.
The good news is that after a short sale, a borrower’s credit score starts to improve within the first 24 months. One benefit of a short sale is that consumers usually can buy another home in two to three years, rather than five to seven as is the case with a foreclosure.
Don’t wait until a foreclosure is imminent to consider a short sale. Many studies show a large number of consumers don’t talk to their lenders because they are embarrassed and worried they might start to foreclose.
A homeowner doesn’t have to be behind on payments to initiate a short sale, but lenders have little incentive to accept less for a property until a borrower has missed a payment.
We specialize in helping those trying to avoid foreclosure and have provided a great resource on Avoiding Foreclosure and Short Sales in Atlanta.
Contact us to receive a free report on the first steps to avoiding foreclosure.
Contrary to popular perception, short sales are not a steal. But, since they are usually priced slightly below current market value, they are a very good deal.
For buyers, the challenge is the length of time to get an offer approved. Two to six months or longer is typical, though lenders are upgrading computer systems and hiring staff to reduce response times.
When a short sale is approved, the lender sends an agreement to seller detailing the terms. Pay close attention to the wording and, if possible, have a real estate attorney review it. Most of the time, the lender will release the seller from any further obligation to repay the debt.
Some states prohibit lenders from pursuing a seller for the unpaid balance. Note in all states holders of second liens and equity lines of credit can pursue sellers unless there is an agreement in place.
Normally, borrowers would have to pay a tax on amount the lender forgives since the IRS views this as income. If they meet of IRS description of insolvency at the time the debt is forgiven they are not liable for taxes. Until 2012, the Mortgage Forgiveness Debt Relief Act sellers will not owe taxes on the amount of debt forgiven for their primary residence. Second homes and investment properties do not qualify.
Click here if you’d like to buy a Smyrna Vinings short sale or foreclosure . We keep an up-to-date list of all the latest short sales and foreclosures in the Smyrna Vinings community and we’ll be glad to assist you in finding the best opportunity for you.