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What You Need to Know About Short SalesBY: Marvin Scott | Category: Shopping | Submitted: 2010-10-20 21:23:16
Article Summary: "This article explains what a short sale for house is and details some other choices to contemplate. Avoiding home foreclosure can be done with the right knowledge..."
What is a short sale? Here are some common questions and some quick answers below.
1) The definition of a short sale
When a home owner is in a situation where they must sell their home for less than the amount to pay off the mortgage we call this a short sale. A short sale is appropriate for sellers whose financial situations require that they liquidate their property and who are not able to qualify for other loss mitigation techniques. Simply put a short sale is when the value of the property has dropped below the current mortgage balance owed.
2) Can I be sure my bank will cooperate?
A foreclosure is a bad thing for the bank. A foreclosure will cost the bank lots more than other options and past experience has shown that after a bank gains a property by foreclosure it is in worse shape compared to other options because of unhappy owners who leave the property a mess or in damaged conditions. A short sale helps the bank preserve losses and helps the home owner sustain their credit. If you are in a hardship situation your bank would much rather do a short sale than foreclose on your property.
3) I have an FHA loan. Will my bank do a short sale?
Yes a bank will allow a short sale for your FHA loan. In fact FHA has introduced the Pre-Foreclosure Short Sale Program or PFS that will pay you the seller up to $1,000 at the end of the short sale just for completing the short sale. This program was designed to help you transition to more reasonable living costs while avoiding a foreclosure.
4) Do I have to be late on my payments to do a short sale?
You do not have to be delinquent on your mortgage to to get short sale approval. There are more details below on the requirements for short sale but it is important to know that a short sale can be done because of the value of the home falling below the loan value or if the seller has met with tough times. A hardship situation is all you need to qualify for a short sale. A short sale will not be approved if you want to move because the house next door lets their dog bark all night or if kids keep throwing baseballs in your yard. A real hardship is what is required for a bank approved short sale.
5) Will I be issued a 1099 tax form on my short sale?
In most cases you will not be required to pay taxes on the loss. President Bush signed The Mortgage Debt Relief Act in 2007 that does away taxes 1099 forms and tax losses on short sales. It was common practice for banks to send out a 1099 tax form to the recent short seller that ordered the seller to pay a tax on the banks loss. This procedure has been prevented because of the depressed economy. The Mortgage Debt Relief Act has been extended through 2012. It is important to consult a certified accountant in regard to your personal situation because not all short sales are protected. For instance an investment property sold by short sale is not covered by the Mortgage Debt Relief Act but there might be other options.
6) How long does a short sale take?
A carefully designed short sale strategy will yield speedy results. Many inexperienced agents will muddle a short sale out over 8 months to over a year and many times fail in attempt to ever get a short sale approval. A knowledgeable short sale realtor will promptly finalize the short sale process and have your property sold in approximately 60 days from contract date. Short sales are a highly technical business and it takes realtors with the know how who will complete the short sale at a quick pace.
Let us now dig a little deeper into what a short sale is and some possible alternatives.
When a seller must sell and there is not enough equity in the property to pay off the mortgage it is call a short sale. A short sale is desirable for property owners whose financial picture or predicament requires that they sell their house and they have run out of other loss prevention options. A short sale is when the value of the property has dropped below the current mortgage balance that needs to be paid off.
Before doing a short sale it is good to know your options. Sometimes if you have defaulted on your loan it is "curable" and there is a strong option that you are able to replace lost income or diminish your costs.
Special Forbearance - A special forbearance is a payment contract between you and your lender that comprises of a plan to reinstate your mortgage after it is non-payment status. Some variations are settlement over a period of time, a cutback of your payment for a brief time, or a arrangement for you to begin again with complete monthly payments while delaying the missed payments. In a sense your bank is allowing you to get caught up on your missed payments.
Loan Modification - A loan modification is a permanent change to your mortgage. It lets your loan be reinstated and supply a monthly payment that you can manage to pay for. Modifications give several options like dropping your interest rate, or expanding the time for you to pay off the mortgage by re-amortization the balance. It's is much like applying for a new loan. Not all loans will qualify for a loan modification.
Combining The Above - It is possible that your mortgage lender will combine strategies to reach a preferred end result. Each mortgage companies are a little diverse on how they handle these issues. The goal of the mitigation options is to keep you owning your house and help you come back from a adjustment in your financial circumstances.
Often the situation has gone too far and there is no chance of you keeping your home. When loss mitigation is not a viable option or cannot work you are presented with a likely foreclosure. Don't give up too quick because there are still some options that remain.
Deed-in-Lieu - A deed in lieu of foreclosure is when you as the property owner deed your house over to the bank. Essentially you give away your home to your bank holding the mortgage. This sounds like an easy out compared to foreclosure but there are some things you need to know.
1) A deed-in-lieu has just about the same effect on your credit as a foreclosure.
2) Lenders don't want your property. It becomes an asset that they have to deal with and selling properties is not what they like to do. Many mortgage companies will not agree to a deed-in-lieu and suggest you try some other option.
Short Sale - A short sale will let you eliminate most of your mortgage loan. Most lenders are willing to accept a short sale instead of going through a lengthy and expensive foreclosure. As already noted this option is for borrowers whose financial condition requires that they sell their property.
These are some reason a bank will grant a short sale:
A declining housing market - This cause does not take into account your credit or your financial state. This is when you are just upside down in your home and owe more than it's worth. Don't forget a short sale means you must sell your home. This does not apply if you want to move because of crime in your neighborhood.
The Mortgage is in or Near Default Status - This is an obvious situation where a bank will do a short sale. Before the housing market crashed short sales were not granted unless the loan was in default. Banks have now discovered that in many circumstances it is better to do a short sale before the payments are behind.
The Seller has Fallen on Difficult Times - This is a short sale situation where there is a real hardship the home owner is facing. All lenders require a hardship letter detailing the reason for the short sale. Sometimes a hardship description can be overdone. There are certain guidelines to writing a hardship letter. You should always cite that you request a short sale so you will not have to go through a foreclosure. Some examples of a hardship are: (Unemployment, Divorce, Death, and Illness)
Something to keep in mind when doing your short sale is your Assets. Your lender is going to require you to fill out a financial statement listing your assets. If they find that you have a bunch of money lying around they might not grant the short sale because they feel you have the ability to repay the deficient amount. Often times in this situation your lender will still allow a short sale but they might demand that you to pay back the balance by asking you to execute a promissory note. This can still be a good solution for a seller who are forced to sell their property and has the ability to pay back a reduced amount of their mortgage loan.
The importance of a knowledgeable realtor cannot be overlooked when doing a short sale. Spend some time interviewing realtors and find the best real estate agent for your short sale situation. Remember, most agents do not know how to do a short sale.
About Author / Additional Info:
Scott Marvin is a Central OH Short Sale professional helping distressed sellers avoid foreclosure. http://www.searchthecolumbusmls.com/columbus-ohio-short-sale-expert-realtor
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