AVOID FORECLOSURE
Is The Short Sale Right For Me?
If you are facing the possibility of foreclosure you may want to instead consider a short sale of your home. A short sale is a way for homeowners to escape foreclosure and avoid the huge toll that takes on their credit score.
Foreclosure can be a long process that is initiated by the lender after a homeowner has been issued a default letter. The foreclosure process is not only stressful to the homeowner and family but may leave lasting consequences regarding self esteem and credit worthiness. The short sale is a viable alternative that gives some control back to homeowner and may avoid a large point deduction on credit reports for years to come. A foreclosure may impact credit scores as much as 250 points whereas a short sale may minimize that hit to 80 – 100 points. If your current score is 680 its easy to see the huge benefit that may be achieved from the short sale. The sole purpose of the short sale is to minimize the negative effect on credit and reduce the stress and loss of control that that often accompanies foreclosure. When you want to purchase a home in the future a short sale will usually allow you to finance one at a reasonable rate in as little as 18 months. You may consult a credit agency for more information.
What Is A Short Sale?
A short sale is a process where the bank / lender will accept less than what the home would sell for in the current market. For example, if you purchased or refinanced a home when the real estate markets were booming and currently owe 280k but are facing foreclosure and current market conditions dictate a sale price of 220k plus closing costs the situation may seem impossible. However with the short sale a lender may accept an offer of 220k or less to effect a sale and cover closing costs. This would allow the homeowner to move forward with their lives without the stigma and loss of credit worthiness associated with a foreclosure.
Why Would The Bank Do A Short Sale?
Lenders in most circumstances would rather do a short sale as it is less costly to them and allows them to move forward so to speak and free them selves from the property. Banks are in business to lend money not own property. Foreclosed property is listed as a liability on the banks books and may affect their credit rating thereby costing them more to loan money. Additionally, foreclosures are very costly in legal fees the bank knows it will never recover from the homeowner. Then after the bank forecloses and owns the property they must hope it sells at auction which will usually be for an even lower selling price. If it does not sell the property at auction then it becomes an REO Real Estate Owned by the bank and will then have to be sold by a realtor. If the latter happens the bank is also responsible for taxes, maintenance and homeowners association dues as IT is now the homeowner. Once again the bank does not want to have to do this so the short sale is a win / win for both you and the bank.
What Is The Downside To The Short Sale?
The bank has the right to enter a deficiency judgment against you for the difference between the sale price and what was owed. Additionally the bank may 1099 the difference which means the IRS may treat that as income. A successful short sale may be able to eliminate a deficiency judgment and keep your tax liability to a minimum. For detailed information regarding legal or tax implications it is advisable to consult an attorney or tax professional respectively.