Shockingly, there are homeowners that short sale their house and still have the ability to buy another house right after. You're probably thinking.. "How?" If you’re finding yourself upside down in your mortgage, meaning you owe more than what the house is worth or the property value continues to drop, or you just need to sell your house fast because you need to relocate, you’ve probably wondered, "Should I short sale my home?” Hopefully this article helps you make an informed decision.
What Is a Short Sale?
The homeowner is usually the party that initiates the short sale when the home value drops by 20% or more, they owe more than what the home is worth, or they just need their home sold fast. Before the process can start, the lender that holds the mortgage has to okay the decision to proceed with a short sale. In most cases, the lender usually ask for documentation that supports the notion that a short sale is feasible. If the short sale is approved, the buyer will negotiate with the homeowner first and then with the bank. Just remember, no short sale can take place without lender's approval first.
Short sales usually require a lot of paperwork, and may take up to a whole year to process. The benefit is a short sales won't affect your credit as bad as a foreclosure will. A short sale will probably look better to future lenders and creditors because it shows you took initiative before the bank had got a chance to foreclose and take your house. A homeowner who has gone through a short sale may even, with certain restrictions, be able to buy another house shorty after.
Why Do People Short Sell a House?
A short sale is not a “get out of jail free” card. It will have some impact on your credit and on your ability to get a future mortgage, but it's a much better option than a foreclosure.
Below are some benefits of a short sale vs foreclosure:
Less Credit Damage
The damage to your credit rating is typically less after a short sale than after a foreclosure. Some lenders report the mortgage loan as discharged after a short sale, while others note the debt was settled for less than what was owed, which could hurt your credit more. The short sale will stay on your credit report for 2 years while a foreclosure would have an even more impact by staying on your credit for at least 7 years.
A foreclosure action is initiated and prescribed by the lender and the laws governing the proceedings in Florida. You will be evicted either during or right after the foreclosure process ends where as a short sale is structured like a normal home sale. The lender will specify a short sale time frame, like six months, giving you more time to pack and find a new place to live than a foreclosure typically would. You can sell your house fast for cash to investors like Option Capital Investments, LLC. where you'll be able to better negotiate your terms.
New Mortgage Eligibility
You will be eligible for a new, low-interest home loan insured by the Federal Housing Administration and backed by Fannie Mae within two to three years after a short sale. If you have a foreclosure on your credit report, you won't be able to qualify for a Fannie Mae loan for up to seven years after the foreclosure.
Simply put, it can save you money. The average legal cost to a homeowner going through a foreclosure is approximately $7,500 not to mention the additional costs that can build up throughout the often times lengthily foreclosure process. If the homeowner can't afford payments, the foreclosure could eventually lead to bankruptcy as well.
Depending on the circumstances and the likelihood of the lenders recouping the amount owed on the house, they won't always file for a deficiency judgment in a foreclosure. Though, in a short sale, if all parties are in agreement, the new buyer could absorb some of what the original homeowners owed the lender. This would ease the original homeowner's hardship and put them in a more manageable situation.
How Do I Do a Short Sale on My House?
If you've done your due diligence and a short sale seems like the best option for your situation, how do you actually do a short sale?
First you need to contact the bank/lender and explain to them that you need to sell your home, but you know you won’t be able to get back the value of the mortgage balance. Keep in mind that the lender manages the sale and they have to agree to any sale, so the process can be time consuming. The lender will let you know if you qualify to do a short sale or not.
FAQs About Short Sales
Now that you know what a short sale is and how it works, let’s take a moment to clear up a few misconceptions most folks have about short sales.
How Long After The Short Sale Will I Be Able To Qualify For Another Mortgage?
If you want to qualify for an FHA loan, you can’t have a history of being 30 days or more late on your mortgage payments or other installment payments (such as car, student loan payments) within the previous 12 months prior to the short sale. Also, you can’t have been 30 days late on mortgage and installment payments in the year prior to application. The guidelines are different for each lender.
Will I need to pay taxes on forgiven debt?
Forgiven debt is simply the difference between the amount of the short sale and your actual mortgage balance and is taxed by the IRS because it is considered income. However, there are some exceptions including the following:
Gifts, bequests or inheritances
Certain payments on the balance of a mortgage under the Home Affordable Modification Program
Qualified student loans
Any debt that, had it been paid, would have been a deductible item for the borrower
A qualified reduction in price offered by a seller
You should always consult a tax attorney or adviser prior to making any tax related decisions.
How much will my credit suffer after a short sale?
The truth is, there is no clear answer to that question because there are many factors that influence your credit score. Generally speaking, if you’ve never been late on a payment (credit card, mortgage or car payment, for example), then your credit score will decrease as a result of a short sale but not as much as if you had missed payments.
Also, it's also dependent on how the bank reports the short sale to the credit bureaus the way that the bank reports the short sale to the credit bureaus. You need to know and understand the lender’s terms before you come to an agreement on how the account will be settled. If the bank reports that your mortgage has been paid in full, then your score won’t be affected as much as if it were reported as “settled for less than full balance.”
Are there any prerequisites to me being able to short sale my house?
If you are able explain in a “hardship letter” why you need to sell the house (e.g., you lost your job and had to relocate to another area to find another gig), there is a possibility that your lender will approve your short sale. Be sure to consult a professional.
We hope this article helps you make informed decisions when determining if a short sale is right for you. If you’re looking to sell your house fast on Fort Lauderdale or surrounding areas in South Florida to avoid foreclosure, you can also contact us directly at (305)930-3945 or email at email@example.com