A short sale is a situation where a seller owes more money on a property than the property will sell for in today's market… and the seller is unable or unwilling to bring money to the table at closing to make up the difference.
When people talk about short sales they are usually talking about negotiating with the lender (or lenders if there are multiple mortgage liens) to accept less than the total amount due as full payment. Negotiations on the amount forgiven usually occur with the seller's lender after an offer has been accepted to purchase the property.
Not all lenders will agree to short sales, but it usually costs the lender less than foreclosure and if there is demonstrated hardship they will often agree to negotiate a short sale.
Unfortunately, loss of equity due to declining values is not considered a valid hardship to qualify for a short sale. However, the following are typical hardships lenders will consider…
- Job loss or reduced income
- Business loss or failure
- Illness and medical costs
- Divorce or death of a spouse
- Natural disasters
Applying for a short sale is much like applying for a mortgage in reverse… instead of proving you can pay, you must prove you cannot pay and your only other recourse is foreclosure. You will be required to provide detailed financial information and supporting hardship information. For most people it requires more paperwork to get out of your mortgage than it did to get into it.
In the past you had to miss payments before a short sale would be considered but that is no longer the case. In fact, you may even be able to purchase another home right after closing on a short sale if you do not have any missing or late payments, otherwise qualify to purchase and have been fully released from liability after the short sale.
From a seller perspective, a short sale is often preferable to foreclosure because it doesn't damage your credit as much. If you are current with other payments and are only behind on your mortgage, a short sale may lower your credit score by as little as 50 points while a foreclosure can lower your score by 200 points or more, and remains on your credit history for 7 years.
Prior to the Mortgage Debt Relief and Emergency Economic Stabilization Act of 2008, any money forgiven by a lender on a short sale was considered taxable income. This act allows taxpayers to exclude debt forgiven from 2007 through 2012. This applies to a principal residence only, if the loan balance was less than $2M for a couple or $1M for one person.
Short sales aren't the answer for everyone. If you are in financial distress beyond your mortgage you may be more concerned about a place to live than about preserving your credit. The foreclosure process takes months, in Minnesota it takes about a year… a time when as the homeowner you don't make house payments, can still live in your home and can create a cash cushion to help you move on with your life after you leave the property.
Seek advice from qualified finance, tax and legal professionals or approved foreclosure avoidance counseling agencies to discuss your personal situation. Beware of scams. Here are links to some resources…
- Avoiding Foreclosure - info from the US Department of Housing and Urban Development
- Hope Now – find a HUD certified counselor in your area
- Making Home Affordable– FAQ about government homeowner programs, including the new HAFA program which allows $1,500 for short sale homeowners to help with relocation expenses
You may have heard horror stories about how long it can take to negotiate a short sale, sometimes without success. If you are considering a pursuing a short sale, be sure to ask your Realtor about his/her short sale knowledge, experience and success rate.