No, this isn’t a two-hour sale at some department store. Short sale refers to selling your home for less than what you currently owe on the mortgage.
While a short sale isn’t an ideal situation, it can be better for you, your finances, and your credit rating than a foreclosure. However, you need to consider carefully what it means if you become involved in a short sale.
Basics of a Short Sale
Before you decide that a short sale is the right move, you need to know that it:
- Is not guaranteed. Your lender has the option to allow a short sale or not. They will only do it if they feel it is their best or only option for retrieving their money.
- Requires documentation.Before your lender will allow a short sale, they will want:
- A hardship letter in which you explain why you can no longer make your monthly payments.
- A statement of your income and assets.
- A comparative market analysis that shows comps – price of comparable properties in your area that have recently sold or have been on the market for a long time.
- Any liens on your property.
- A buyer with an offer.
- May take a long time to close. Unlike traditional real estate transactions, short sales take extra effort because not only do the buyer and seller need to agree to a selling price, the lender has to approve it.
- Requires a good real estate agent. Having an expert who understands short sales and has negotiated others is extremely advantageous.
- Requires good legal and tax advice. Many experts suggest that you get legal and tax advice before you complete a short sale.
Your goal for proceeding with a short sale is to close the deal with your lender agreeing to take less or even no money at all and reporting to the credit bureaus that your account is paid in full.
Getting Real Estate, Legal, and Tax Advice
A short sale can be a balancing act, so getting professional assistance might be a good idea. However, understand what skills an agent, attorney, and accountant each bring to the table.
- Real Estate Agent.The right agent – one who has previous experience in short sales – can assist you by:
- Identifying the right type of short sale. There are generally four types of short sales: traditional, Home Affordable Foreclosure Alternative (HAFA), Fannie Mae HAFA, and Freddie Mac HAFA.
- Compiling and submitting a short sale package to lender.
- Assisting you to identify a home price.
- Marketing your home.
- Negotiating and submitting the deal to your lender.
- Real Estate Attorney. It is against the law for a real estate agent or accountant to offer legal advice if they are not licensed to practice law. Instances when you might need legal advice for your short sale include:
- A release of personal liability. Once you complete the short sale, you should request a release of liability. This protects you from future requests to repay the difference between your outstanding mortgage and the actual sale price on your short sale home.
- Asset protection. No lender likes to lose money on a loan. They will likely look at your assets and income to determine if they can recoup any or all of their loss.
- Tax Accountant. One of the biggest benefits of having a tax accountant to advise you is from a tax liability angle. While the IRS offers information on the Mortgage Forgiveness Debt Relief Act, if you need additional financial and tax assistance, you would be wise to speak with a tax accountant.
Additional Information on Short Sales
A few final words of advice before you decide a short sale is right for you. Keep in mind that a short sale:
- Does not automatically discharge your debt. You may still owe your lender the difference between the sale price and the balance due (see the section on Real Estate Attorney above).
- May result in a higher tax liability. When a debt is forgiven, it is considered a relief of debt and may be treated as income for tax purposes.
- Will have an impact on your credit score. The exact impact will depend on many factors, be sure to investigate the situation fully ahead of time.