As many people continue to struggle to make their mortgage payments, they are considering all options that may help them get out of their home. With the drop in home values, one of these options is a short sale or discounted payoff. A short sale is when a lender agrees to release the lien and approves a sale on a home that is for less than the full amount owed on the property. For example, assume that the amount owed on the mortgage is $100,000, but the property sells for $90,000 and the lender accepts this as payment in full for the loan. Lenders will not always accept a short sale as it may be financially better for them to foreclose on the property.
Before considering a short sale you should:
– Obtain legal advice from a competent real estate lawyer.
– Call an accountant to discuss short sale tax ramifications.
A short sale requires the approval of the lender and contacting the lender early can save a lot of effort. If a borrower decides that a short sale is the best option, they need to contact their lender and speak to someone who will be able to make the decision that a short sale is acceptable. The lender will require documentation to make a decision. This approval should be gained before the house is put on the market as a short sale. Keep in mind that once a buyer is found, it still may take more time than normal for the offer to be accepted. If a buyer needs to move quickly they may not be able to wait for the decision from the lender.
A short sale will still affect the seller’s credit rating since it is reported as a pre-foreclosure that has been redeemed. It also may have tax ramifications as the difference waived on the loan may be reported to the IRS as income. At this time, most people should not have any tax ramifications thanks to the Mortgage Forgiveness Debt Relief Act of 2007. Homeowners should contact an accountant or lawyer to make sure there are no tax ramifications from the short sale.
In some cases, the lender may consider the remaining unpaid amount a deficiency balance and they will try to collect. Some states prohibit collection of this deficiency. Borrowers should always get assurance in writing that the lender is accepting the amount of the short sale as payment in full.
A housing counselor can help a borrower determine the best option available and assist in this process.
