Define a Short Sale for a House
If your home is worth less than you owe on it, or your financial situation has changed significantly and you can no longer afford it, you may be considering a "short sale." A short sale is an alternative to foreclosure, but your lender must agree to it.
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Definition
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A "short sale" occurs when you sell a property for less than what is owed. For example, if you owe $120,000 on your home, but can only sell it for $100,000, you might ask the lender to accept a short sale. If your home has more than one mortgage on it, all of the lenders have to approve the short sale. The incentive for the other mortgage holders is that they would likely get nothing if the home was foreclosed.
Documentation
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If you intend to ask your lender to approve a short sale, you need to document why you can no longer pay the mortgage as agreed: loss of income or significant unexpected medical expenses, for example. You will have to show your lender current financial documentation, including proof of income and expenses, recent tax returns, medical statements, etc. You will also probably have to write a hardship letter. You will also need to list the property for sale and receive an offer approved by the lender for the short sale to go through.
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Reason a Lender Accepts a Short Sale
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Lender consider shorts sale to avoid the costs of foreclosure. Foreclosure can take a long time, especially in some states, and can be quite expensive for the lender. The cost of foreclosure may exceed what the lender will lose on a short sale. The closer the amount offered in the short sale is to the amount owed, the more likely the lender is to accept a short sale.
Impact of a Short Sale on Credit
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A short sale may or may not affect a borrower's credit. If he is able to execute a short sale before become delinquent on the mortgage, and the lender reports the mortgage as "paid in full" on the borrower's credit report, there will be little to no impact on the borrower's credit. If, however, the lender reports the mortgage as "settled" or anything other than "paid in full," the brorrower's credit will suffer. Most experts agree that a short sale on a credit report is only a little better for a credit score than a foreclosure. But the borrower may be able to qualify for another mortgage sooner than with a foreclosure.
Other Short Sale Consequences
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A lender may send a borrower a 1099 for the difference between the amount owed on a mortgage and the amount received in a short sale. For example, if a home has a mortgage of $150,000, but the lender only gets $120,000 in a short sale, the lender may send the borrower a 1099 for $30,000. The borrower may have to report that $30,000 as income for that year. Also, the lender may be able to pursue the borrower for a deficiency judgment for the difference. Not all states permit deficiency judgments. Seek advice from an attorney or certified public accountant about your specific circumstances.
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References
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