If you’ve talked to any real estate agents recently, you’ve probably heard about the increase in short sales currently taking place. Surprisingly, there are people who short sell their home and are able to buy another home soon after. How can this happen?
If you’re finding yourself “underwater” in your mortgage, meaning that you owe more than what your home is worth, you’ve probably asked yourself the question – “Should I short sell my home?”
Short selling your home may be a difficult decision to make since it may affect your credit and potentially prevent you from getting another loan for several years. However, if you decide to short sell your home it may be the best time to do so now.
As a homeowner, who bought a home before the housing bubble burst, I’ve been doing a lot of research in terms of options available to people like me, who are underwater. Unfortunately AND fortunately, I’m not in a financial hardship and there aren’t many options for those of us who can make the house payments but want to sell their home due to other circumstances (new job).
I’ve worked hard on having a good credit score, after all, credit is everything nowadays. So, not making my mortgage payments is not an option for me. A loan modification seems not to be an option either, unless I’m late on my payments or in a financial hardship. So, my only option left is trying to short sell my home.
After speaking with several real estate agents, I learned about some facts and myths that are out there about short sales that I wanted to share.
Myth: I won’t be able to buy another home for several years after short selling.
Truth: You may be able to buy an FHA-approved home after a short sale only if you’ve never been late on your payments and your new home is cheaper than the one you’ve just sold.
According to a letter by the Department of Housing and Urban Development (HUD) issued in December 2009, “Borrowers are considered eligible for a new FHA-insured mortgage if 1) they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and 2) the proceeds from the short sale serve as payment in full.”
It’s also important to note that a person who is interested in short selling their home in order to buy a new one, will need to buy a smaller and cheaper home if they’re interested in buying soon after the short sale took place. Also, keep in mind that if you decide to buy a home right after a short sale, you’ll most likely have to pay a higher interest rate than someone who has never defaulted on a debt.
Guidelines are different for each lender. For example, Fannie Mae will not allow you to buy another home for a minimum of two years, even if you’re current on all your payments.
Myth: I will need to pay income taxes on the forgiven mortgage debt.
Truth: According to the Mortgage Debt Relief Act of 2007, if you’ve sold your home for less than what you owe, you won’t have to pay income taxes on the difference. (There are certain restrictions.)
According to the IRS, if you sold your primary home (you’ve lived in this home for at least three out of the last five years) through a short sale, you may not owe any taxes on the canceled debt. However, this act expires in December 2012. So, if you decide to list your home on November 2012 but your home doesn’t sell until February 2013, you won’t be covered under this act and you will most likely owe taxes on the difference.
However, it’s always wise to consult your tax advisor before making any tax-related decisions. A real estate agent familiar with short sales will also be able to give you more information about the Mortgage Debt Relief Act.
Myth: My credit will be ruined if I short sell my home.
Truth: Your credit score will suffer as a result of a short sale but the impact is different for everyone.
There isn’t a sure way to know exactly how much your credit score will suffer if you short sell since there are many factors that determine your score. Generally speaking, if you’ve never been late on a payment (credit card, mortgage or car payment, for example), then your credit score will decrease as a result of a short sale but not as much as if you had missed payments.
Also, the way that the bank reports the short sale to the credit bureaus will make a difference in the severity of the impact on your credit score. This is why it’s very important that you understand the lender’s terms BEFORE you agree on how the mortgage loan will close and be reported to the credit bureaus. If your mortgage lender reports that your mortgage has been “paid in full,” then your score won’t be hurt as much as if it was reported as “settled for less than full balance.”
Myth: I won’t be able to short sell my home unless I’m late on my payments.
Truth: You may still be able to short sell if there are other circumstances that prevent you from keeping your home, such as relocating for a job.
It’s true that lenders will give more consideration to homeowners that are late on their payments since it shows a hardship. However, if you are able to explain to your lender in your “hardship letter” why you need to sell the house (e.g. lost your job and had to relocate to another area to find another job), your lender may approve your short sale.
All these guidelines mentioned above could change at any time. Consulting a tax advisor, real estate agent and an attorney before making a decision will help you make a more educated decision.
We hope that this article helps you come up with questions to ask as you determine whether a short sale is for you.