Are you facing a foreclosure? Are you thinking that would be the best thing for you? There are alternatives.
Have you ever heard of a "short sale"?
This may be an alternative to a foreclosure. A foreclosure will cause a lot of damage to your credit rating. It can really affect your interest rates in the future and has a long-lasting effect on your credit score. A short sale can reduce some of this damage.
A short sale happens when you sell your house
for less than the amount owed to the lender.
The best way to describe it is to give an example. Let’s say you bought a house for $400,000 and you financed it 100% 5 years ago. Let’s say you have been paying the monthly payments for 5 years and now the loan is down to $380,000. At the same time house prices have went down and the house is only worth $340,000. If we now find that we can’t make the payments and are considering just letting the mortgage company foreclose, the alternative is a short sale. A short sale is where you find a buyer that will pay $340,000 for the property and then you get the mortgage company to agree to accept that instead of the $380,000 that you owe.
You may be asking yourself right now, "why would the mortgage company do that?" Well there are a few advantages to this for the lender. In a nutshell, the lender is not in the real estate business and they really don’t want to own your house. Owning real estate just slows down the process of getting their money and actually causes many more problems for them. There are legal problems to the actual foreclosure that cost them money, and the entire time spent is much longer than with a short sale.
You benefit from the short sale in a couple of ways as well.
Your credit history and credit rating are not as badly damaged as with a foreclosure. It still hurts your credit to do a short sale, just not as bad as the alternative.
One key thing to get from your lender on a short sale is a "letter of non recourse". This is a letter from your lender stating that the short sale completely satisfies your debt to them and they agree to not come after the balance. Without this in writing, you may find that some lenders will try to get the difference after the sale and now you have another problem on your hands.
No one wants to have to go through this situation, but if you find yourself here, team up with a real estate agent that is familiar with short sales and has done a few. It is important for them to know what to say and do with your lender to help you the most.
See my post on Debt Forgiveness May Not be Taxable in 2007 to see how this new tax law may affect you. In the past, when you had debt forgiven, it was counted as a gain for you and you had to pay taxes on that gain. This new law may help you in that regard on a short sale. Be sure to check it out as it has many nuances that may change how it impacts your tax liability.
Lastly, try to relax. This is a stressful time but you will get through it.
Tough times never last but tough people do!
As with all my financial or tax advice, I am not advising as a professional and I give no professional legal or tax advice. If you need professional advice, please get that from a CPA or attorney.
Leave us a comment. Do you have more information or tips on getting through this problem? Please share them with us all!