Selling Your Home For Less Than You Owe
If you’ve taken out a large mortgage, and perhaps refinanced to cover remodeling or other expenses, you may find yourself unable to keep up with your mortgage payment after a layoff, divorce or illness. More and more people are finding they need to sell their homes for less than they owe on the mortgages, known as a short sale.
Selling short is definitely better than foreclosure, which stays on your credit record for ten years. But it’s best to try to work things out with your lender before going through the embarrassing and laborious process of selling your home on a short sale.
Tax Issues
Before you put your home on the market for a short sale, it’s best to talk with a tax advisor about possible tax repercussions. It’s likely the IRS will consider the difference between the value at which you sell your home and the mortgage balance as income on which you’ll have to pay taxes.
An exception to this rule is if you can prove that you were insolvent that your debts were bigger than your assets- before your mortgage lender agreed to a short sale of your property. A tax advisor will be able to tell you for sure whether you’d be considered insolvent by IRS standards.
If you can’t prove you’re insolvent, and the tax bill on a short sale would be more than you can pay, you may have to let the mortgage lender foreclose, or declare bankruptcy.
Be Upfront With The Real Estate Agent
If you find selling you house for less than you owe on the mortgage is an option short of foreclosure or bankruptcy, you’ll want to find a real estate agent who understands your situation. Agents typically take a much lower commission on short sales, and it often takes much longer to actually close the sale once the seller accepts an offer. But many agents sympathize with financial problems brought on by unexpected circumstances, and may want to help.
Convincing Your Mortgage Lender
The buyer will need your help in negotiating a short sale approval with your mortgage lender.
Your bank will have to be convinced that you deserve to be approved for a short sale. You’ll need to tell your mortgage lender about your financial hardships, including layoffs, divorce or medical issues.
While this may seem obvious, now is not the time to rack up the purchase of luxury items, like fancy cars or jewelry. Your lender will see these debts on your credit report and become convinced you’re a loose spender who doesn’t deserve a break.
It may also be necessary to provide the lender, either directly or through the buyer or buyer’s agent, documentation of your financial hardship, such as pay stubs, bank statements and so forth. While this may seem like an invasion of your privacy, try to think of it as the fastest way out of an otherwise overwhelming debt.
Short sales take much longer to close than more conventional sales, so plan accordingly. If it works, you’ve avoided bankruptcy and an ugly mark on your credit report. If it doesn’t work, you’ll know that you’ve done everything you could to avoid foreclosure and/or bankruptcy.
What is a Short Sale?
- Homeowner sells for less than what is owed on the loan
- Lender accepts the amount as payment
- Seller escapes foreclosure, but receives no funds
- Lender does not report foreclosure to credit bureau
- Foreclosure is an automatic 100-120 point hit to a credit rating and stays on the report for 7-10 years
- Lender could report the short sale in a number of different ways. There could be a 40-50 point hit for the short sale. (NOT AS BAD AS FORECLOSURE!)
What is Foreclosure?
3 Myths and Truths -
- Myth #1 Lender want to foreclose on delinquent homeowners
- Truth Lenders are in the business of loaning, not owning!
- Myth #2 Financially distressed sellers have worked through their options with their lenders
- Truth Financially distressed means stressed. These sellers may not realize there are positive options, and they could be avoiding creditors
- Myth #3 Short Sales are hard
- Truth If you can do a mortgage loan application you can complete a short sale
Do you Qualify?
Facing foreclosure does not automatically make someone a good candidate for a short sale. If a homeowner has money or assets elsewhere, the lender will not be interested in negotiating a short sale. Remember a short sale will usually cost the lender less than a foreclosure, but the lender is still losing money
The homeowner should be able to demonstrate a hardship that caused him to miss his payments. This information will be added to the short sale proposal. The homeowner will write a note about what happened and will compile the supporting documentation. If the homeowner's loan rate adjusted, obtain copies of the loan statements. If the homeowner ecountered medical issues, gather copies of those bills. If a spouse died, request a copy of the death certificate
The homeowner must be financially insolvent. The homeowner must have no means of meeting the loan obligation and must have no other options
The market value of the home must be less than the loan amount
A short sale is not for people who simply regret bad financial decisions
