What Is A Short Sale?

In a short sale an owner sells his house before the lender forecloses on the property. The sale price is usually less than what the owner owes. Lenders must agree to a short sale and must agree to receive less than they are entitled to under the loan agreement(s).

The reason some lenders allow short sales is that it makes financial sense for the lender. Lenders are usually not equipped to sell the home. Foreclosures are expensive for lenders, and they often do not receive all they are owed in a foreclosure.

The main benefits of a short sale for the owner is that he or she is released from liability under the loan and will not have a bankruptcy or foreclosure on his or her credit record. But, the owner’s credit will be negatively affected by a short sale. A short sale and a foreclosure are both bad. It is simply a matter of degree.

There are disadvantages to a short sale for the owner. If the owner sells the house, he or she will be expected to leave when the escrow closes. However, if the owner stays in the house during the foreclosure until told to leave, the owner can save money, serious money. The legal procedures to foreclose on the property typically take many months. Also, many houses don’t sell at foreclosure auctions. The owner probably will not have to move while the foreclosure proceedings go on. And if the house fails to sale at the foreclosure auction they can remain in the house even longer. For example, if the mortgage payment is $5000.00 a month and owner stays in the house for eight months without making a payment, he or she could save $40,000.00.

A short sale may generate taxable income. The amount of income is based on the amount the sale proceeds are short of what the owner owes on the mortgage. This can happen if the owner borrowed against the principal residence and used the money for any purpose other than acquiring or improving that property. If the owner uses the loan buy another piece of property, purchase automobile or boats, take a vacation or pay for education expenses the amount the lender writes off is considered forgiven debt. The Internal Revenue Service treats forgiven debt as taxable income which is subject to regular income tax.

In some areas, it is hard to gain approval for short sales. The economy being what it is lots of people are trying to negotiate short sales. Most lenders lack the personnel to make quick decisions on the sales. Multiple lenders can make a short sale almost impossible. If an owner has only one mortgage he or she has only one lender to convince. If there are two or more mortgages the owner must convince all of the lien holders.

The more lien holders there are the harder it will be to obtain a short sale. This is especially true when the house value has decreased a great deal. A short sale will probably produce little or no money for a second or third mortgage holder. Since these lenders will not get anything out of the short sale they will have no incentive to release their liens.


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