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. If you’re also looking for a mortgage for your new home, get your questions answered by a Home Loan Expert today!

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This Post Has 15 Comments

  1. I’m 71 and cannot keep up with the house. I don’t want it to deteriorate, but also cannot afford the upkeep. Do you think my lender would let me short sale or maybe short sale and a personal loan for the balance?

    1. Hi Richard:

      A short sale is certainly an option, but if the house is still in decent condition, you might just want to put it on the market. All real estate markets are different, but in much of the country, prices are still on the rise. With that in mind, you might be able to put it up and get at least the balance of the loan if not a profit. I would at least explore your options to traditionally put it on the market. We do have a service and In-House Realty where you might be able to get some help from a licensed real estate agent. Hope this helps!

      Thanks,
      Kevin

  2. This is my situation. I have had my home on the market for 6 months. The 5-mile radius in the area on which my home is located has over 300 houses for sale in the same price range as mine. I’ve done 4 open houses and have had a few walk-throughs with Realtors but still not one offer. I’ve lowered the price 3 times now and still, nothing. My hardship is that I’m getting up there in age and I live alone. When I bought the house, I was married with kids. Now, it’s just me. I have a bad back, tennis elbow and torn ligaments in my one shoulder. I use about 20% of the house and cannot maintain it in my condition. Would any of this be considered a hardship to quickenloans, with whom I have my mortgage? I’m not looking to make ANY money off this, except enough to pay my Realtor’s fee, attorney’s fee and enough to get into an apartment (1st month, last month and security.) My credit is excellent and I have no desire to buy another home. What do you think is the best route for me? Short sale? Suck it up and lose money or even risk never selling? My realtor is #1 in the area so it’s not this person’s lack of trying. This person has gone above and beyond but the market is poor for sellers and, especially in my area, almost impossible to sell a home. Please, any advice would be appreciated.

    1. A short sale is certainly an option, but there’s a credit hit to that that can’t be avoided. I would advise looking at every other option before that. Maybe you could move into an apartment and make the payment every month until it sells. Converting to a rental might be an option. That way you could have the money to make the payment and move into a new place. The other thing that concerns me a little is this: You seem to like your realtor and that’s fine, but four open houses in six months seems a bit low. I’m going to have someone reach out to you to see if we can offer any advice.

      Thanks,
      Kevin

  3. I have been trying to sell my primary home faithfully 3 different times with no luck. I already own another home we we intend to move into after the sale. We are self employed and cannot afford to stay in our primary house any longer. Its killing us financially, emotionally and physically. The house is in great shape and we have one of the best agents out there, but still no offers. Our price has been reduced to what we owe and we would still need to come up with the agents fees at time of sale. Any advice would be greatly appreciated.

    Thanks

    1. Hi Don:

      Before you consider anything drastic like a short sale, I just wonder whether you should try another agent. I know you like the one you have, but if the house really is in decent shape, houses are not staying on the market very long right now. If you do consider a short sale, there’s going to be a credit hit and it will impede you from getting another mortgage for a while. If you already have another home, maybe that’s not as big of an issue, but I still wouldn’t do it if I didn’t have to.

      Thanks,
      Kevin Graham

  4. If Your House Isn't Selling, There Is Always a Reason Why. Check To See If You're Making Any Of These Errors - We Buy Houses in Apopka Florida says:

    […] You might talk to your real estate agent about doing a lease option purchase versus an outright sale. Lease options are appealing to borrowers who, for a variety of reasons, might not be in a position to purchase a home through conventional financing. Maybe they can’t decide whether to buy or rent. Make sure your lawyer reviews all documents before you agree to sign. Check out: Should I Short Sell My House? […]

  5. I need some advice and quick before next week on how to either keep my house and try to make up missed payment or deal with a short sale of my house. I don’t want to sell my house because i dont have anywhere else to go with my 16yr old and ill relative who lives with me. Can uou email me with a contact # to reach you?
    Thanks,
    Worried about to lose home with nowhere to go.

    1. Hi Lyz:

      We would love to offer any advice we can to assist you in trying to save your home. The best number to reach out to you would depend upon whether or not your Quicken Loans client or just trying to see if we can help you refinance to potentially better your situation. I have forwarded your request to our Client Relations team so that they can reach out to you and get more information. Please be on the lookout for an email.

      Thanks,
      Kevin Graham

  6. Hi,
    I am considering short sale because I purchased 2 primary residences prior to the bubble bursting in 2005 and 2006 when I relocated for work. Both houses are upside down and I have them rented but I am bleeding monthly because of the loss of homestead exemptions (county taxes). This causes me a great deal of stress and I’m not as young as I use to be.
    I think that I should just pull the trigger and unload these houses and the burden.
    One is a VA and the other is FHA.
    Please advise.

    1. Hi BMG:

      You can certainly look into a short sale, but one thing you need to be aware of is the credit hit. You may have limited mortgage options for the next several years if you do the short sales.

      Since one of these loans is a VA loan, one of the things you can do is refinance the property for up to 120% of its value in order to reduce the rate. That might provide some payment relief. With the FHA loan, you might consider contacting your servicer about options for a modification.

      If you do decide to go through with a short sale, staying current on your mortgage and installment payments in the year leading up to the short sale and in the 12 months prior to the new application will help you qualify for an FHA loan faster. Hope this helps!

      Thanks,
      Kevin Graham

  7. This was very helpful. I don’t know if you still monitor this blog but I’d like to know how the process went for you if you went through with it. I have been trying to stick it out and keep my home long after many others bailed on theirs. I’ve reached the point where I don’t think I can keep up.

    1. Hi Honey:

      While a short sale is an option, there’s a credit hit involved and you often have to wait a certain amount of time before you can apply for a mortgage again. I’m going to have someone reach out to you to look into your situation and any other options you might have before you go down that path.

      Thanks,
      Kevin

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