Selling a home below what is owed to the lender, also known as a short sale, may help a homeowner who has experienced a financial catastrophe or upside down on their property. The process does take some time to complete, and homeowners benefit significantly from hiring a professional to help with the short sale procedure.
What happens to a homeowner who pursues a short sale? Is the process akin to bankruptcy? Will engaging in a short sale make it hard to get a mortgage loan in the future? Is a short sale better than foreclosure?
Let’s learn about what happens to a homeowner when a short sale is approved by the lender and after the process is complete.
Release of Lien on the Home
In a nutshell, a short sale occurs when the bank agrees to accept less money than is owed on the mortgage. The process requires an application and paperwork, which are most easily submitted by a professional who is licensed and specializes in short sales or at times an experienced real estate agent.
When the bank approves a short sale, and the deal is finalized it removes the lien it places on the property, which otherwise prevents the homeowner from satisfying the debt. Once the short sale process starts, the seller can begin accepting offers on the home at an amount less than they owe on the mortgage loan subject to the lender’s approval.
The Lender requires an arm’s length process, which means no connection between seller and buyer (without disclosing). For such a process it is best to use a specialized short sales company. Further, an agent and a specialist help reduce the chance a homeowner may experience fraud during the sales process.
Unfortunately, homeowners who engage in short sales of their homes, as well as homeowners of distressed properties, encounter fraud far too often. Lenders in most cases will not allow such sales. A professional is trained to look out for signs of fraud and to avoid suspicious buyers during the short sale process.
Credit Report Consequences After a Short Sale
It is correct to assume that a short sale will prove less injurious to a credit report than a bankruptcy or the sale of their home as aa “foreclosed” property meaning “REO”. Should you sell your property for a short sale, a future lender will distinguish a record on your credit report was from a short sale however, an actual loss of your home through a foreclosure sale or a bankruptcy is reported as a public record.
When a lender approves a short sale, they agree to accept less money than is owed on the mortgage loan. A mortgage loan is a promise by the homeowner to pay back the loan under the terms and conditions of the mortgage. A short sale means the homeowner isn’t keeping their end of the bargain with their lender, but the lender accepted it.
Sellers may expect evidence of a short sale to remain on their credit report for a few years. At the same time, it is understood that you worked with the lender to find a solution versus losing the home in foreclosure.
Paying Off the Remaining Balance
Several factors come into play when it comes to whether a homeowner must repay the balance owed on their mortgage loan or whether that debt will be forgiven. In some cases, a mortgage company will forgive the balance still owed to them by the homeowner after the short sale process is complete. (Check with your accountant for the forgiveness of debt possible cost.)
In such circumstances, the seller might need to consider the tax ramifications of having a large debt forgiven. The federal government counts forgiven debt as income. In other cases (mostly in non-judicial states), the mortgage company or lender may pursue the seller for the unpaid balance. This will usually occur in one of two ways. The lender will ask the seller to sign a new promissory note indicating the seller will pay the remaining debt. In other cases, a lender will get approval to ask for the money at some point and will pursue collections at a later date.
In any case, it’s important that the seller understands completely what the lender may do after the sale so there are no future surprises, unexpected tax bills, or continued negative collections activity. The great negotiator in most cases will be able to negotiate no further money owed to the lender after the short sale.
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