What is a Short Sale on a Home?

What is a Short Sale on a Home?
There's been a lot of talk over short sales the last several years, but most people don't know exactly what a short sale means, or what kind of effects a short sale will or can have on you. Also what is the difference between a short sale and a foreclosure. How do I qualify for a short sale and how do I go about buying a home after a short sale. All these things I will cover today. A short sale is not right for everyone, so I will detail the things that you will want to know and then you can make the decision if a short sale is something you will need to do. 
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First and foremost, a short sale by definition: A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens (mortgage) against the property, and the property owner cannot afford to repay the liens' full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. In other words, a short sale.

Any unpaid balance owed to the creditors is known as a deficiency. Short  sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties. As an experienced short sale agent, I utilize the services of a local attorney that specializes in first and foremost helping another homeowner avoid foreclosure, and second, they're available to assist homeowners with protecting what assets they do have after the short sale process is complete. Not all short sales are the same, so each one is handled case by case, but ideally the goals are to assist the homeowner in either settling the unpaid balance (also called deficiency) in some sort of payment plan or forgiving the debt, in which case the homeowner would then walk away from the short sale owing nothing.
However, the scenario is not as easy as it sounds because there is what is called The Mortgage Forgiveness Debt Relief Act and Debt Cancellation. What this means to you is anytime a debt is canceled (otherwise know as forgiven) it can be taxed. If you borrow money and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally report-able as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you. I can't stress enough how important it is to have an experienced short sale Real Estate agent and a Short Sale attorney on your side when you sell your home as a short sale. There's many benefits to having a professionally negotiated short sale not only for the home owner but also anyone that is buying a short sale
A short sale, which in many cases is not short at all can become cumbersome for all parties involved. In most cases, a short sale can run between 4-6 months and possibly longer if the homeowner has two mortgages.
From a buyers standpoint, a short sale can be a very lucrative investment if they have the time and funds to wait. Typically, a short sale buyer will deposit a sum of earnest money at the time they present their offer. These funds are deposited into the listing agents trust account and held until an agreement is reached or the parties mutually cancel the pending offer.

Even after a short sale buyer has waited the few months for their offer to be accepted by the bank, there's no real guarantee that they will get to purchase the property in the end. It is definitely a risk for a short sale buyer, but many times the purchase price is well below fair market value which means after purchasing a short sale buyer could potentially have a good sum of equity already built in the home.

For a homeowner selling a short sale, the experience can also be a bit tasking. Most people complete a short sale when they don't have a lot of alternatives. An approaching divorce, job loss, health issues or work limitations can definitely cause a financial strain. There's help out there though!! Please at least speak with a professional about your options as a short sale is always better than a foreclosure!

A foreclosure is simply allowing the bank to completely take over the home. Yes, it does seem like the simpler options when tough times happen, but I assure you in the long run it is not the best option. If you are late on your payments you're probably already receiving endless harassing phone calls from your mortgage company. Just know they won't stop there. The bank will notify you of the foreclosure proceedings and allow you the opportunity to catch up on your mortgage but you will have to pay a penalty and interest. If you are unable to catch up your home will be advertised in a Sheriff's sale (sold in auction). After the Sheriff's sale has been completed you will have a 6 months redemption period. At this time you can attempt to get the house back, but likely the full loan amount comes due and will need to be paid off in it's entirety. 
If you vacate your home during this time and it's found to be abandoned, they can force a 6 week expedited take back of the home. Meaning you cannot return for your things and likely the servicing company for the bank will remove your locks and replace them with theirs.

The worst down fall to a foreclosure is the time it takes to get back on your feet to purchase another home. With a short sale you're typically looking at 2-3 years before you can purchase another home, but with a foreclosure it can be 7-10 years before you will qualify to purchase another home.
No matter what you situation or circumstance is, talk to someone about your options. A short sale is always better than a foreclosure. Just because the foreclosure sounds easier it's not, remember the tax ramifications and forgiven debt, they don't just go away.

Thank you for reading my blog, "What is a short sale?" For advice, questions or help, please contact me at 612.807.4858 or via email at HerdaHeidi@gmail.com

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