An
increase in foreclosure rates will inevitably bring with it an increase in
short sales. But what is a short sale?
A short
sale happens when you sell your house for less than your remaining mortgage
balance, the proceeds of which go to the lender and in return the lender
forgives the remaining balance. Selling your home as a short sale is one way to
avoid foreclosure.
As a
general rule, lenders lose money when they foreclose on a property.
Consequently, they would rather not have to foreclose if it can be avoided. A
short sale represents an opportunity to cut their losses because a short sale
usually allows them to recoup more of the cost of the loan than a foreclosure
process would.
However,
don’t think that a short sale is an easy thing to accomplish. In order to get
permission for a short sale, you must provide documentation showing a genuine
financial hardship. And don’t think that the decision for accepting a short
sale is solely in the hands of the lender. Sure the lender must first agree,
but this is not the final word. If there is mortgage insurance involved, this
company also gets input on the decision. If there is an investor backing the
mortgage, they also get input as to whether to accept a short sale.
The
transaction process for a short sale can be rather cumbersome as well, whether
you’re on the buying or selling side. Many short sales fail due to additional
demands by the lender, such as requiring the broker to reduce his or her
commission and/or that the seller signs a document requiring him or her to pay
back the shortfall.
If
you’re on the selling side of a short sale, consider having your agent or other
experienced professional negotiate with your lender for a better deal. And
remember, if the lender does accept a short sale and forgives part of your
debt, that is considered taxable income and you must declare it as such to the
IRS.