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What is a Short Sale and How Does it Work?

Simply put, a short sale happens when a homeowner sells the house for less than they owe on it.   It requires the knowledge and experience of a Realtor who has been trained to negotiate short sales, and it also requires a lot of paperwork, time and patience.   It’s also a good idea to consult with a good real estate attorney with any specific concerns that you have. 

If you are upside down on a mortgage and find yourself without funds to pay that mortgage payment, it’s in your best interest to find a short-sale expert to help you plan and maneuver through this minefield.  It’s not a time to panic – but to carefully consider your options.  How this is transaction is structured can make or break your financial future.  There is specific terminology that must be included in your documents if you want to walk away from the home without having to pay the mortgage balance.  A ‘deficiency judgment’ is not something you want to have happen to you.  This is one instance where you must do your homework!  A Realtor and an attorney are your best friends right now!

Don’t make the mistake of thinking a short sale is a foreclosure!  Here are some of the differences:

  • Short Sale – It’s possible to sell the home and walk away, owing nothing. There is usually less effect on your credit score, and you can usually apply for a new mortgage within 2-3 years.  Many times, you can remain in the home without making payments. 
  • Foreclosure – If this is your only option, and you don’t want to repay the debt, then bankruptcy may be necessary. A foreclosure usually causes a larger drop in your credit score and will remain on that report for at least 10 years.  You may have to wait 5-7 years before you can apply for a new mortgage.  This is a re-possession.  You will have to vacate and the lender will sell the home after they have taken possession. 
  • Deed-in-lieu of foreclosure – This is where you convey all interest in the property to the mortgage company to satisfy a loan that is in default, thereby avoiding foreclosure proceedings. The mortgage company must agree to this request.

What About 2nd Mortgages and HELOC loans (Homeowner lines of credit)?

If you have a 2nd mortgage or HELOC loan, this lender also must agree to the short sale.  The primary mortgage holder is always in first place to collect any available money, so this can get tricky.  All lenders must agree on the sale or the short sale will not happen!  You may be required to pay these additional loans.   Sometimes, the 2nd mortgage holder (or any lienholder) will agree to a lesser amount if you agree to pay the negotiated amount. 

Tax Consequences of a Short Sale

You should always ask your tax professional about this, but generally speaking, you will have to pay tax on the amount ‘forgiven’ in the short sale transaction.  For example, if you sell the home for $100,000 but your mortgage amount is $125,000 – then you would have to pay tax on the difference of $25,000 (which is the amount that was forgiven). 

How Long do Short Sales Take to Close?

Many things come in to play here, but if you provide all your required documentation quickly and have a knowledgeable short sale expert that stays on top of things – then you could possibly close it in 90-120 days.  It will make a difference in the time frame if you have 2nd mortgages or lienholders to deal with.   These additional liens could be mechanics or tax liens.  It just depends on all the specific pieces to the puzzle. 

Where Do You Find Short Sale Properties?

Your Realtor can make sure you have access to short sale properties as soon as they hit the market.  They are usually in the local MLS system.  I have all listings in Southwest Missouri on my website.

What is the Single Most Important Thing About a Short Sale?

By far, the most important thing is avoiding a deficiency judgment!  Make sure you have a letter (in writing) stating that the lender ‘forgives the excess loan amount or deficiency amount’.  Otherwise, you could be making payments on that house for a long time to come.  And since you also have to have a place for your family to live now, this means you could be making payments on two houses for the foreseeable future.    

I’m a 35-year veteran Realtor, certified in negotiating short sales, so please call me with any questions you have.  You can also visit my blog for more information on real estate topics.  615-428-8500


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