The Idea of a Short Sale
A lot of people buy houses with the intention of making it their home for the rest of their lives, but unexpected situations occur where homeowners have no choice but to move.
Job transfer, divorce, death, illness, financial difficulties, these are just some of the reasons of homeowners for moving.
When these things happen, they will have to put their home in the market so they can move. Before, selling your house was not really a problem, but with the home values dropping, it has become a problem for a lot of people.
Housing prices have been going down in some regions, over the past year. It’s harder to move now because the prices are going down and the profit is not sufficient for you to settle the outstanding loan as well as the closing costs.
With the prices down, what happens could be either default, wherein the homeowner walks away from payment obligations, bankruptcy, or maybe foreclosure. All of which can severely impact your credit rating for a long time.
A good option that has a considerable lower negative impact on your credit would be a short sale.
A short sale is when the lender agrees to accept a mortgage payoff that is less than outstanding loan.
Typically, banks or lenders would not want to do that, but the foreclosure is often a long and expensive process. Banks are under strict regulations and if a certain percentage of their outstanding loans are considered bad debt, they can be fined and sanctioned. So, banks are actually eager to get rid of the property, so long as it does not hurt them more if they do a short sale.
If the borrower is truly going through financial difficulties, in order for the lender to agree to a short sale, you must furnish documents that will prove your hardship, like financial statements, tax returns, pay stubs, medical bills, stocks, bonds, divorce decree, etc. Along with your financial statements, you will need to write a “Hardship Letter” which explains why you can no longer pay the mortgage in detail.
You will have to put your house on the market. Once you sell the property, you will have to supply more documentation; A copy of the purchase agreement, a copy of the comparative market analysis, and a net sheet that shows how much you net from the sale of the property
The amount of debt forgiven is considered as income and is taxable, and you will have to report the income to the IRS.