If you’re a homeowner who has to sell your house at a loss (a short sale), you need to protect yourself with this information! These tips about short sales are from Ethan Ewing, president of Bills.com.
“Many home owners are putting off a sale until prices recover. But some owners must sell at a loss,” says Ewing. “Selling a home for less than the debt on the loan — called a ‘short sale’ — is not desirable, but sometimes it’s necessary for those who face major financial hardship.”
If you’re facing a short sale and want more info, click The Realtor and Home Owner’s Guide to Short Sales: Step by Step. And, read on for Ewing’s tips on selling your house at a loss…
Before You Sell Your House at a Loss – Conducting a Short Sale
A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan.
1. Know what qualifies for a short sale. Several factors make a home a candidate for a short sale. Typically these are a general drop in home values (such as has happened in many markets), a mortgage that is near default status, or a home owner who is unable to pay due to hard times.
2. Find the right real estate agent. The short sale process is specialized. Lenders have stringent requirements and might ask real estate agents to take a lower-than-standard commission. Look for real estate agents with experience.
3. Talk to the lender of your home mortgage loan. If a home is worth less than the mortgage amount, sellers will need special permission from the lender to sell the home at a loss for its current value. If the sale stems from financial hardship, home owners will need to prepare a hardship letter explaining why they need to sell. “Remember that some lenders will be open to the possibility of a short sale to avoid the alternative of foreclosure,” Ewing says. “If you are a good borrower hit by bad times, make sure to communicate this effectively to the lender.”
4. Understand the tax consequences of a short sale. In some cases, a lender forgives the difference between what is owed and the selling price. Lenders can classify that forgiven debt as income to the seller, which means that the seller would be required to pay income tax on the amount. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows some home owners to exclude that income. This exclusion primarily applies to those whose home was foreclosed on or who had debt forgiven as part of a loan restructuring. Individuals who are truly insolvent (total liabilities are greater than total assets) also can file IRS Form 982 declaring the insolvency to have the tax waived.
5. Know that a short sale will impact your credit score. A short sale is recorded on a credit report as a pre-foreclosure proceeding. As such, it will damage credit scores. Still, it may be the best alternative for some homeowners.
6. Consider alternatives. If paying the mortgage is the problem – and there is no desire to sell — some home owners have options available. Some lenders will consider a loan modification, which seeks a permanent change to the loan, such as lowering the payment and extending the loan’s term, or rolling delinquencies into future payments. Government programs such as Hope for Homeowners also fall into this category. Another option is a “deed in lieu” of foreclosure, which essentially allows the borrower to return the title or deed of the property – giving the home back – to the mortgage holder to avoid foreclosure. The borrower forfeits equity in the property, but avoids a foreclosure on his or her credit record.
For ways to avoid selling your house at a loss, read 7 Tips for Mortgage Loans and Refinancing.
Bills.com is a free one-stop portal where consumers can educate themselves about complex personal finance issues, including credit cards, debt relief assistance, insurance, mortgages, and other loans.