As the real estate crisis and recessionary economy continue to affect homeowners, many have tried to escape their mortgages by short selling their properties. A short sale is a transaction where the owner sells his home for less than the amount he owes. The lender must agree to the deal, and stories have circulated of buyers and sellers waiting several months before hearing a decision from the bank. So is this technique the best answer?
Refinancing and loan modification are more efficient, and lenders like Countrywide are much more accepting of these programs than a short sale. But if circumstances prevent you from qualifying for these loans, a short sale can get you out of an unmanageable situation. There are two reasons a bank may agree to a short sale: 1) foreclosure costs can cost the lender up to 18% of the loan amount, and 2) lenders don’t want to carry properties on their books.
Not all houses qualify for a short sale, says our personal finance expert Nathan Threebes. “There must be evidence that home values have gone down in your area, the loan must be in or near default, and the seller must show that financial hardship and lack of assets prevent them from repaying the difference,” says Threebes. .
There are two main consequences of making a short sale. First, under the Mortgage Forgiveness Debt Relief Act of 2007, the IRS allows lenders to issue a 1099 form for the forgiven amount, which you must report as income. Second, your credit report will be affected, although not as severely as a foreclosure (but creditors may not see a difference since your FICO score drops almost as much).
Under Fannie Mae’s new guidelines, holding a short sale instead of allowing a foreclosure can shorten the waiting period between selling and getting a decent rate on a new home. Homeowners considering using this strategy are advised to seek professional advice.