Ever since the housing market crashed, many homebuyers have never been able to recover from the financial hemorrhage they face. Among the various financing strategies, such as loan refinancing and renegotiating mortgage payment terms, sometimes the only option left is a short sale. This is the right choice in a situation where refinancing is not possible and other strategies fail to reduce financial burden and losses.
practical option
In the case of a short sale, the owner will sell the house for less than the full amount owed on the mortgage. For example, if the homeowner owes the bank $300,000, but sells the house for only $200,000, it is a short sale.
This strategy works in situations where the lender will agree to allow the sale to proceed for less than the mortgage balance. Lenders may accept this option when, according to their calculations, the costs and problems associated with a foreclosure are higher than the expected realization of this option.
tax advantage
There may be tax relief associated with a short sale, which is to the benefit of the owner. Under normal conditions, if a debt is neutralized, taxes on the canceled amount are still due.
However, under the Mortgage Debt Relief Act, most taxpayers can exclude assumed income from withdrawing debt on their primary residence. The challenge is that it is generally more time consuming and complicated compared to other options. But it’s worth the effort where other options, like foreclosure, will result in a poorer realization of value.
Other conditions
To ensure this is a suitable option worth considering, the owner should first evaluate comparable sales in the local market. If the market indicates that the home’s current value is worth less than the remaining mortgage, it’s a wise idea to consider a short sale.
Second, the homeowner must be able to show that they cannot pay the different amount to the lender in this case. Bankruptcy, job loss, serious illness and disability are some of the typical personal hardships that can show the owner’s inability to pay the difference in the amount owed.
Comparing a Foreclosure to a Short Sale*
Many real estate experts are of the opinion that while the downside of a short sale is that it can damage the owner’s credit; they know that the consequences and realities of a foreclosure can be much more damaging. In a foreclosure case, the person may have to wait 7 years before being eligible to buy another home, but in a short sale, the waiting period may only be two to three years. Credit scores may be affected or negatively impacted more in a foreclosure than in this option as well.
* http://www.businessweek.com/lifestyle/content/mar2010/bw20100325_243379.htm
