Short Sale: Sell Your Home and Avoid Foreclosure
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Summary:
A short sale is a real estate transaction in which the homeowner sells the property for less than the outstanding mortgage balance. This can provide homeowners facing financial hardship with a way to sell their homes as opposed to foreclosure. While a short sale can help homeowners avoid foreclosure and reduce mortgage debt, it can also have drawbacks such as the impact on credit score and tax consequences.
Though your mortgage payment once seemed affordable, now you’re struggling to make ends meet. You can’t keep up with all of your bills, and your mortgage lender is threatening foreclosure. What can you do?
While it’s not the best choice for everyone, you may want to consider a short sale. In this post, we’ll discuss what short sale is, how it works, its benefits and drawbacks, and the steps you can take to proceed with a short sale.
What is a short sale?
A short sale is a real estate transaction in which the homeowner sells their property for less than the amount owed on the mortgage, with the lender’s approval. The purpose of a short sale is to avoid foreclosure, which can be a lengthy and costly process for both the homeowner and the lender.
In a short sale, the homeowner must demonstrate financial hardship, such as job loss, divorce, medical bills, or a significant decrease in income, that makes it impossible to continue making mortgage payments. The lender must approve the short sale and agree to accept the proceeds from the sale as payment in full, even if the sale amount is less than the outstanding mortgage balance.
The short sale process can be complex and time-consuming, requiring the involvement of a real estate agent, an attorney, and the lender. However, it can also be a viable option for homeowners who need to sell their homes quickly and avoid foreclosure.
What is an example of a short sale?
Say a homeowner owes $200,000 on their mortgage, but the property is worth only $150,000 due to a decline in the real estate market. The homeowner may work with their lender to sell the property for $150,000, and the lender would agree to accept the sale proceeds as full payment for the outstanding mortgage balance and forgive the $50,000 gap.
How to proceed with a short sale
If you’re considering a short sale, here are the steps you should take:
- Contact your lender. The first step in the short sale process is to contact your lender and inform them of your financial situation. You’ll need to provide documentation of your financial hardship, such as bank statements, tax returns, and a letter explaining your circumstances. Your lender will review your situation and determine if you qualify for a short sale.
- Hire a real estate agent. You’ll need to hire a real estate agent who has experience with short sales. Your agent can help you determine a fair market value for your home, market your home to potential buyers, and negotiate with the lender on your behalf.
- Find a buyer. Your agent will help you find a buyer for your home. The buyer will need to submit an offer that is lower than the outstanding mortgage balance. Once you have a buyer, submit their offer to the lender for approval.
- Negotiate with the lender. The lender will review the buyer’s offer and determine if it is acceptable. If the lender approves the offer, they will issue a short sale approval letter. If the offer is not acceptable, your agent can negotiate with the lender on your behalf to reach a mutually acceptable agreement.
- Close the sale. Once the lender approves the sale, you can close the transaction. Your agent can help you with the necessary paperwork and coordinate with the buyer’s agent to complete the sale.
It’s important to note that the short sale process can take several months to complete. With this in mind, be patient and work closely with your real estate agent and lender throughout the process.
Pros and cons of a short sale
While short sales can provide many benefits for homeowners, they also have some potential drawbacks and risks. Make sure you weigh the advantages and disadvantages of a short sale and consider all of your options before making a decision.
Pros explained
- Avoiding foreclosure. Foreclosure can be a lengthy and expensive process that can damage your credit score and make it difficult to qualify for future loans. A short sale allows you to sell your home and avoid foreclosure, which can be beneficial for your credit score and financial future.
- Reducing or eliminating mortgage debt. In a short sale, the lender may agree to forgive the difference between the sale amount and the outstanding mortgage balance. This can help you reduce or eliminate your mortgage debt and avoid having to pay the remaining balance.
- Preserving credit score. Short sales typically have less impact on credit scores than foreclosures, which can help you preserve your credit score and make it easier to qualify for future loans.
- Moving on with your life. Short sales can help you move on with your life and start fresh. By selling your home and reducing your debt, you can focus on rebuilding your finances and improving your financial situation.
Cons explained
- Impact on credit score. Although short sales usually have less impact on credit scores than foreclosures, they can still have a negative effect on your credit score. A short sale may remain on your credit report for up to seven years and can make it more difficult to qualify for future loans.
- Tax consequences. Depending on your specific situation, a short sale may result in tax consequences. You may be required to pay taxes on any forgiven debt or receive Form 1099-C, which reports the canceled debt as income.
- Requires approval from lender. A short sale requires the approval of the lender, which can be a time-consuming and complex process. The lender may reject your short sale offer, leaving you with no option but to pursue other alternatives, such as foreclosure or bankruptcy.
- Cost of the sale. Selling a home through a short sale can be expensive. You may need to pay for repairs, inspections, and other costs associated with selling a home. In addition, the lender may require you to pay some or all of the costs associated with the short sale, such as closing costs and real estate commissions.
- Emotional toll. A short sale can be an emotional and stressful process, as it involves selling your home for less than its value and facing the reality of financial hardship.
Overall, a short sale can be a viable option for homeowners who are facing financial hardship and need to sell their homes quickly. However, make sure you consider all of your options and consult with a professional, such as a real estate agent or attorney, before making a decision about a short sale. Ultimately, the decision to pursue a short sale should be based on your individual circumstances and financial goals.
Key Takeaways
- A short sale is a real estate transaction in which the homeowner sells the property for less than the outstanding mortgage balance.
- While this process can provide homeowners facing financial hardship with a way to sell their homes quickly and avoid foreclosure, it also has some risks.
- A short sale involves working with the lender to agree on a sale price and accept the sale proceeds as full payment for the mortgage debt.
- Before making a decision about a short sale, it’s important to weigh all options and consult with professionals, such as a real estate agent or attorney.
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