Short Sales vs. Foreclosure
Many Sellers have come to me asking my questions about short sales. Here are a few things you need to know to help educate you on this process in case you or someone you know is starting to fall into financial hardship.
What is a Short Sale?
A Short Sale is a real estate transaction in which the debt owing on a property exceeds its actual market value.
What is a Foreclosure?
A Foreclosure occurs when a homeowner fails to make timely mortgage payments and the lender exercises the right to force a "Sherriff's Sale" to satisfy the debt.
When Should I consider a Short Sale?
Evaluate your current financial situation to determine if you can afford your monthly mortgage payment. Once you realize you no longer can afford it, contact your mortgage lender immediately. Don't wait until it's too late and the foreclosure process has already begun.
Why would my Lender agree to a Short Sale?
Lenders do not want to foreclose on anyone if possible. It's a lose, lose situation for both parties. A short sale often has a better return on investment to the lender and allows the lender to collect and cash-out earlier than they would in a foreclosure situation. Foreclosures are also much more expensive to the lender long term.
What is Loss Mitigation?
It is the department within your lender and the process that they use to help you avoid foreclosure,
How does a Short Sale affect my Credit Score opposed to Foreclosure?
A foreclosure can stay on your credit report for up to 10 years and can lower your credit score by 100 points or more. Your credit score is used by credit card companies, auto lenders, insurance companies and many others to determine the rates you will be required to pay. A short sale may not damage your credit score if the lender accepts the offer and does not report negative credit behavior. Typically, any payments missed leading up to a short sale remain on a credit report for 7 years. So be sure to keep your payments up during the process.
Will I receive a 1099 from the lender after the sale?
The Mortgage Forgiveness Act of 2007, passed by President Bush forgives the loss and eliminates the 1099 tax penalty on short sales. The IRS Publication 908 also addresses this issue. In some cases, where the seller is insolvent (incapable of meeting one's current debts), the 1099 penalty can be avoided all together. Contact your accountant for more information
What if my house does not sell during the Short Sale Process?
Another alternative to foreclosures is called Deed in-lieu. Deed in-lieu of foreclosure is to voluntarily give the property back to the lender to prevent the lender from bringing foreclosure proceedings. Although this is more damaging to your credit than a short sale, it is still better than a foreclosure.
If you feel that you may be falling into financial hardship just remember two things. You are not alone and there is help. Please call me so that we can get your home listed and sold before it is too late for you.
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