What Is a Short Pay House for Sale?

Short sales are becoming more prevalent in today's housing market.

The housing crisis is forcing many homeowners to make difficult decisions. Foreclosures are very common as some owners simply walk away from paying on a home that is worth half of what they mortgaged it for. Owners trying to sell homes find a glut of homes already on the market and no buyers. When a buyer is found they are usually not willing to pay what the owner originally purchased the home for, thus creating a short sale.

Definition

Short sales allow the sellers to avoid bankruptcy and foreclosure.

A short sale occurs when the lender accepts a payoff which is less than the amount due on the mortgage. Typically a seller in a short sale transaction is in arrears on the mortgage payments. This is not always the case. Some homeowners are trying to maintain their credit rating so they have not fallen behind when they enter a short sale. Prior to the housing crisis, lenders wouldn't consider a short sale unless the seller was in arrears. The economic times have altered their outlook. Typically lenders are not happy about negotiating short sales, so having a real estate agent or attorney is recommended for these transactions.

Short Sale Process

The process for a short sale involves the seller contacting the lender to determine the needed documents. Documentation includes letters of hardship, bank statements, pay stubs and other financial records. The lender considers the market price of the home by looking at comparables and reviews the purchase agreement. The buyer works with a Realtor, preferably one acquainted with short sales, to make an offer on a short sale property. Short Sale Addendums are recommended in order to have a backout option. It is also important for the buyer to get an appraisal and a home inspection after the lender has approved the offer.

Pros and Cons of a Short Sale

Short sales take between two weeks to five months to close. Banks are not in a hurry to accept less than the mortgage price. The housing crisis also has led to a backlog of foreclosure paperwork and banks are simply overwhelmed. Homes sometimes slip into foreclosure before the short sale is approved. Tenacity on the behalf of the buyer is required, short sales can be a long process. Unlike foreclosure homes, short sales usually have an engaged seller, that can mean the house is in better condition. Gutted foreclosure homes are not uncommon. The buyer is also getting a home at below market value which is a plus.

Credit Effect

Credit scores will dip after a short sale.

A short sale affects the seller's credit in the same way that a foreclosure does. The term short sale will not appear on the credit report, however there will be a designation for the account not being paid in full. The effect on credit can last up to seven years, however, timely debt payments and low balances can help overcome the negative repercussions. Some sellers elect to pay the difference between the sale and the mortgage in an effort to minimize the effect on their credit. Sellers who actively work on repairing credit after a short sale can repurchase a home in as little as two years.

Tax Implications

The forgiveness amount must be claimed as income on the tax return.

A short sale creates income for the seller because of the amount forgiven by the lender. The IRS requires this forgiveness amount to be reported as income on the federal tax return. The Mortgage Debt Relief Act of 2007 excluded the forgiveness amount created by a short sale from being reported as income. This Act was effective from 1/1/07 to 1/1/10. As of fall 2010, it is not known if this period will be extended. In the event that it is not extended, sellers engaging in short sales will be subject to tax on the forgiveness amount, for sales occurring after 1/1/10.

Considerations

There are some considerations before either selling or buying a short pay home. Federal programs exist for homeowners who want to keep their homes but are having trouble making the payments. The bank may be willing to refinance at a lower rate to avoid foreclosures or short pays. There are still programs that exist for first time home buyers. These programs offer attractive financing and the homes are usually new or in good condition. For some buyers getting financing on a home that is not a short sale or foreclosure is quicker and easier.

References

• Short Sale Process: Short Sales
• Realty Times: Considering Short Sales
• Realtor: Field Guide to Short Sales

Resources

• Making Home Affordable: Request a Home Affordable Modification