Austin Texas – A homeowner thinking of a short sale recently asked me why they should short sale versus just walking away and letting their lender foreclose on the home. I gave them the short answer: “It’s much better for your credit.”
But, I knew there are many more benefits to a homeowner than simply better credit. So I put together the main benefits and here they are.
1. The upside down house debt is erased and not taxable in most cases. If you are selling because of a financial hardship and you owner-occupy the home, then the upside down house debt will be automatically erased in most cases. If your loan is owned or insured by the following agencies: Fannie Mae, Freddie Mac, FHA, USDA, and/or VA; their policies specifically state that your short sale debt will be erased completely. And per IRS publication 544, if you are "insolvent" (liabilities exceed assets) when the debt is forgiven, the forgiven debt will most likely not be considered taxable by the IRS.
2. You are eligible to buy another home much sooner compared to a foreclosure. The most common loan programs, Fannie Mae and FHA, stipulate that you can buy another home under their programs in about 12 to 24 months depending on the program you qualify for. Buying after a foreclosure; you are looking at 4 to 8 years, and perhaps even longer if your lender files deficiency judgments against you.
3. Short Sale is at NO Cost To You. That's right. A short sale costs you nothing. ALL the common selling expenses are paid by your lender(s). That includes the title insurance, attorney fees, agent commissions, and back taxes.
4. Your credit suffers less damage and Deficiency Judgments are not normally filed against you with a Short Sale. Many people think that a short sale will be the kiss of death to their credit. The opposite is true. Your credit rebounds much more quickly with a short sale versus foreclosure. Another benefit is that you will have less debt after the short sale since the house debt is completely erased in most cases. (More debt normally hurts your credit score.) So you will have a lower debt to income ratios, which could actually boost your credit scores. Within 1 to 2 years, your credit scores will likely be back to normal or maybe even higher than before you short sold. Finally the biggest benefit: deficiency judgments are NOT normally filed against you with a short sale. Deficiency Judgment laws vary by state, however in Texas, they can follow you around for 8 to 10 years after the foreclosure.
5. You can often rent a comparable house for less than your former mortgage payment. I often see homeowners rent nicer homes for less money in the very same areas and neighborhoods they short sold in.
6. You avoid the humiliation of a foreclosure. Neighbors normally know when foreclosure occurs (it's a fairly public event). Not so with a short sale. With short sale, your listing often looks like all the other normal seller listings in the neighborhood.
7. You don’t have to pay rent or make payments during the short sale process. Most short sales take 3 to 12 months to complete. Most people do not make mortgage payments during the short sale process (but do continue to live the house). You can use that savings of not having to make house payments or rent payments to relieve other financial pressures in your life and get back on your financial feet.
8. You will likely qualify for some type of cash at closing incentive. These cash incentives can range from as little as $1,000 to $3,000, and go as high as $10,000 in some cases. These are being paid by Servicers, Lenders, the U.S. Treasury (HAFA), Banks, and FHA (HUD) to Short Sale your home (versus letting yourself be foreclosed on). Think of it as a reward for doing the right thing. You can use this money you receive at closing for moving costs or to just get back on your financial feet. Why are these incentives being paid ? Because about 70% of the homeowners that could short sell, don't even try. Instead, they just walk away inflicting the maximum damage to themselves and their lender. The government and lenders are trying to change that behavior by offering short sellers cash money.
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