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A short sale is an option available to home-owners that have a foreclosure or bankruptcy staring them in the face. A short sale is basically a sale of property for an amount less than what the home owner owes the banker or mortgage company. Needless to say that the bank has to agree to the ideal of the short sale and the amount agreed. If a short sale occurs the borrower is forgiven the remaining amount of the loan.
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Banks agree to a short sale when they can see that the borrower is in serious financial distress and that there is little chance of him repaying the remaining mortgage amount. They may do the math and figure out that the small loss with a short sale is probably better than bearing the expense of a foreclosure sale. Besides there is no guarantee that a foreclosure sale will actually materialize. Many foreclosure auctions end without a sale.
A short sale does appear to be a win-win situation for all involved. The seller avoids bankruptcy, the buyer gets property at a reduced price, the lender gets back a substantial amount of his money and is not faced with the prospect of being stuck with accumulating real estate that is not selling.
As a home-owner you need to be prepared with all the documentation and arguments to put forth to the lender in favor of a short sale. Some qualification criteria for a short sale include a drop in the home’s market value – it should be less than the unpaid amount that is due to the lender. You are close to defaulting on your mortgage; however you can still try for a short sale even if you are current with your payments.
It is important that you convince the lender that you have fallen on hard times. This is the crux to getting a short sale application approved. But there are clear cut guidelines as to what constitutes a hardship. If you have been a spendthrift you cannot tell the bank that you are facing financial hardships. If you have let go of valid income opportunities, then it’s your fault that you’re hard up now.
Genuine examples of hardship include unemployment, divorce, medical emergencies, deaths in the family, bankruptcy, etc.
Your chances of qualifying for a short sale may take a beating if the lender discovers that you have some assets that can help you pay off the mortgage.
As a seller you have to be prepared for tax consequences of a short sale. The amount of debt that is forgiven may attract tax. Insolvency is an exceptional case. A short sale will have consequences on your credit standing. The effect is the same as that of a foreclosure. It can mean a loss of 200 to 300 points on your FICO score.
Take expert advice on a short sale. Ask the lender to give in writing an assurance that the short sale will absolve you of all debts.
