Short sale means that a house is sold for lesser amount than what the current owners owes to the mortgage company, usually the bank. Short sale occurs in the case the lender is unable to pay back the mortgage and aims to avoid foreclosure. For this transaction to take place all the parties involved who owe money have to agree to accept less return of money. This complexity results in the total time of the transaction to increase. Another reason for greater time is that mortgage on a short sale usually belong to more than one party, hence, a number of approvals from multiple banks and lenders is required. There is no guarantee that the bank will accept the short sale offer. Recently there has been a great increase in the number of transactions taking place as short sales and foreclosure despite it being one of the last options. Short sale is common decision to endure a relatively small loss early on rather than a greater one on foreclosure.
How is short sale different from foreclosure?
With short sale the home is still owned by the home owner but in foreclosure the bank takes ownership of the house. They account for less credit score and help you avoid foreclosure. Though it is still considered as ‘’not paid as agreed” but with foreclosure the seller is unable to take a loan for a 5-7 years while with short sale the time is reduced to about 2 years. Short sale can or cannot exempt the seller from the remaining mortgage debt that is owed. There are also some credit and tax implication. Normally the debt that is forgiven is reported as taxable income on homeowner’s tax returns. It depends on the agreement between the mortgage company and the homeowner. In case the home owner is unable to sell a house on short sale, the bank goes for foreclosure directly.
Is it the right option for you?
Short sale can be the best option in some situations. Unlike before home prices are moving sideways or dropping and this results in negative amortization loans and home owners find themselves in situation where mortgage balance becomes greater than the value of their homes. If you are facing some long term hard ship and would not be financially stable for some upcoming years. If you are unable to keep up with mortgage amount and you owe more on the house than it’s worth. If you have not been able to sell the house at the price that covers your mortgage and plan to leave the respective house than short sale might be one of the suitable options, you have.
You may have to prove to the mortgage company that you merit a short sale by proving to them of your difficult situation by providing relevant documentation. It is a more beneficial alternative to foreclosure. The government encourages short sales. Short sale might be the solution to your problems as it is less troublesome in the long term than a foreclosure.
Despite short sales being a better option than foreclosure in many aspects. They should still be considered as a last resort. Ultimately, the bank or the lenders first priority is to avoid financial losses. You can consider many alternatives and then make your choice.