A short sale is a home sale in which the mortgage holder (the bank) agrees to accept a payoff that is less than the loan balance.
Typically, homeowners use a short sale when the value of their home is less than the balance of the mortgage and they want to avoid foreclosure. They’re said to be “Upside Down”
The sellers, the buyer and the mortgage lender(s) all must agree to this type of sale. Short sales accounted for a third of all home sales in the early part of 2010
The Process:
A short sale is initiated by the property owner. In a short sale, the buyer makes an offer on the property which is accepted by the seller and made contingent on the lender’s approval. With the assistance of his Real Estate agent, the owner/seller packages the sales contract with an explanation of why he cannot continue to make loan payments, along with a comparative market analysis of the property that demonstrates the sales price is at or over the market value of the property. If the bank approves the contract, with or without a counter offer, the sale can proceed.
The Credit Implications:
A short sale can reduce the homeowner/seller’s credit score by anywhere between 85 and 160 points. It is treated the same as a foreclosure because both actions result in a loan not being fully repaid. The precise impact depends on a host of variables: the homeowner’s starting credit score, how many credit accounts he/she has, and what actions preceded the short sale, such as the number of missed payments. In general, the higher a homeowner’s credit score was before the short sale, the greater their score will be impacted.
The Tax Implications:
Before December 20, 2007, any amount of a mortgage a homeowner took out but did not pay back because of a short sale or foreclosure was considered taxable income. The Mortgage Debt Relief Act of 2007–in effect for calendar years 2007 through 2012–makes an exception for owner-occupied homes that have been foreclosed or sold by short sale. You must still pay taxes on the difference between the mortgage and short sale payoff amounts for rental property.
The Complications:
Unless the seller includes a contingency in the contract that the lender agrees to accept the purchase price as payment in full for the loan, the lender may later come back and try to collect the balance of what is owed on the loan. This not only defeats the purpose of the short sale but could harm the seller’s credit more than a foreclosure would. Without this agreement, a seller might be better off waiting for a foreclosure, because a foreclosure wipes out the loan obligation. A further complication arises when there is more than one loan on the property. All lenders must be party to the short sale. When there is more than one loan on the property, a foreclosure does not end the obligation of the seller to repay secondary loans. Short sales also take much longer than traditional sales.
Home Affordable Foreclosure Alternatives (HAFA):
Also known as Home Affordable Modification Program took effect April 5, 2010 and provides federal incentives to help home owners through the short sale process. It requires lenders to forgive any remaining loan balance, provides $3,000 to borrowers for relocation costs, $1,500 to loan servicers for administrations costs, and $2,000 to investors who allow up to $6,000 in sale proceeds to be allocated to subordinate lien holders (second and third mortgages) and streamlines the short sale process.
