If you’ve talked to any real estate agents recently, you’ve probably heard about the increase in short sales taking place. Surprisingly, there are people who short sale their home and are able to buy another home soon after. How is this possible?
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 sale my home?”
It may be a difficult decision to make since it could affect your credit and potentially prevent you from getting another loan for several years. However, if you decide to go the short sale route with your home, now may be the best time to do so.
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 homes due to other circumstances.
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. My only option left is trying a short sale on my home.
But before we go much further, let’s cover the basics.
What Is A Short Sale?
A short sale occurs when you sell your house for less than your existing mortgage balance. This has to be done in collaboration with your lender (or lenders if you have a second mortgage with a different company). The lender has to approve any sale.
Why Do People Short Sell A House?
In 2008, the housing market crashed. Since then, property values have been steadily going up over time, but the market has definitely recovered faster in some areas than in others. That creates a problem if you want to sell your house and move on but don’t get enough out of this sale to pay off your mortgage.
A short sale is not a “get out of jail free” card. It’ll have some impact on your credit and could have an impact on your ability to get a future mortgage. However, it’s better than a foreclosure. We’ll get into some of this later on, but for now let’s look at how a short sale works.
How Do I Do A Short Sale On My House?
If you looked into your options and a short sale seems like the best way forward for your situation, how do you actually go about doing it?
The first step is to contact your lender and explain to them that you need to sell your home for one reason or another but you know you won’t be able to get back the value of the mortgage balance. You and your lender will then talk about whether you’re qualified to do a short sale. Different lenders may have different standards.
The important thing to note is that the lender manages the sale. They have to agree to any sale, so the process can take some time.
Dispelling Some Myths About Short Sales
Now that you know how a short sale works, let’s take the time to clear up a few misconceptions people have about short sales.
Myth: I won’t be able to buy another home for several years after a short sale.
Truth: In certain circumstances, you can get an FHA loan within three years of the short sale date.
If you want to qualify for an FHA loan, you can’t have been 30 days late on your mortgage or other installment payments (such as car and student loan payments) in the 12 months prior to the short sale date. Additionally, you can’t have been 30 days late on mortgage and installment payments in the year prior to application.
Guidelines are different for each mortgage investor. For example, you can’t get a conventional loan to buy another home for a minimum of four years, even if you’re current on all your payments.
Myth: I will need to pay income taxes on the forgiven mortgage debt.
Truth: While you’ll probably pay taxes, it’s not black-and-white.
The difference between the amount of the short sale and your actual mortgage balance is considered forgiven debt. The IRS considers this forgiven debt income and, in most situations, you’re taxed on it. However, there are exceptions.
It’s always wise to consult your tax advisor before making any tax-related decisions.
Myth: My credit will be ruined if I short sale 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 sale because 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 were reported as “settled for less than full balance.”
Myth: I won’t be able to short sale my home unless I’m late on my payments.
Truth: You may still be able to short sale 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 who 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., you 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 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!
If you happen to be looking to purchase a short sale, here’s more information.