What is a Short Sale?

Filed Under Business |

by May C.

Many homeowners bought their houses because they thought they would be staying there for a long time, if not forever, but then something happened

Homeowners forced to move due to some unforeseen or unexpected events, like job relocation or reassignment, divorce, death, or maybe financial difficulties.

When these things happen, they will have to put their home in the market so they can move. Before, selling your house was not really a problem, but with the home values dropping, it has become a problem for a lot of people.

Over the past year, housing prices have been plummeting in some areas and the profit from the property just isn’t enough to pay off the outstanding balance of mortgage and cover the selling and moving costs.

There are many things that could happen as a result of this; Default, bankruptcy, or foreclosure. All of which will have a negative impact on your credit rating for a long time.

Depending on your outstanding mortgage, the best alternative that has a significantly lower negative impact on your credit would be a short sale.

A short sale is when the lender agrees to accept a mortgage payoff that is less than outstanding loan.

Typically, banks or lenders would not want to do that, but the foreclosure is often a long and expensive process. Banks are under strict regulations and if a certain percentage of their outstanding loans are considered bad debt, they can be fined and sanctioned. So, banks are actually eager to get rid of the property, so long as it does not hurt them more if they do a short sale.

You have to be truly experiencing financial hardship, to be eligible for a short sale. You will have to disclose your assets, and there are documents that the borrower needs to submit to the lender to get the short sale approved; Financial statements, tax returns, pay stubs, medical bills, stocks, bonds, divorce decree, etc. Along with these documents, you will need to write a “Hardship Letter” to explain your financial difficulties.

These documents will not be enough to get the lender’s approval for the short sale. The homeowner will have to put the house on the market and sell the property. Once you do, you will need to provide additional documentation. You will need to provide a copy of the comparative market analysis, a copy of the purchase agreement, and a net sheet which shows the net or loss from the sale of the property.

The forgiven debt is taxable income, and will be reported to the IRS.

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