What is a short sale? Redfin says, “A short sale is a home that is listed for sale at a price lower than the amount owed on the mortgage. Homeowners hope to sell their home as a short sale to avoid going into foreclosure. It can be difficult to buy a short sale because there are often two mortgages on the home. You’ll likely have to convince multiple banks and lenders to take a loss on their original loan. This is why it often takes so long to approve a short sale offer. If the short sale fails and the homeowner can’t afford to pay his mortgage, then the bank forecloses on the home.
Short sale homes are still owned by the homeowner, while foreclosures are owned by banks. If the homeowner cannot sell the home through a short sale, the bank initiates foreclosure to try to sell the home directly, often in an auction. The auction may fail to turn up a buyer willing to pay at least what the bank was owed on the home, the home then becomes Real Estate Owned (REO), where the owner is the bank. The bank then typically sells the property through a real estate agent.
NOLO says saving your credit score may be the most touted reason for choosing to short sale your home rather than letting it be sold at a foreclosure sale, however according to myFICO, short sales, foreclosures, and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts and are considered the same for purposes of your FICO score.
When a lender approves a short sale, what is the lender agreeing to do? At the very least, the lender is agreeing to remove or release the lien on the property. A seller would have a near impossible task in selling a property without this lien release.
Is the lender also agreeing to cancel the seller’s obligation to repay the loan in full? Not necessarily. Some lenders ask sellers to sign new, unsecured promissory notes before approving the short sale. Other lenders, without asking for new promissory notes, reserve their right to collect the deficiency — the remaining balance of the debt.
If your lender forgives you for a deficiency after a short sale, you may owe taxes on the forgiven amount. That’s because it’s considered income by the IRS, upon which you may owe federal and state income tax. Under the federal Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from your income all or a portion of the amount of forgiven debt in a short sale.
Fannie Mae’s 2016 guidelines allow you to reapply for a mortgage four years after a short sale with a 10 percent downpayment. If you sold your home as a short sale due to extenuating circumstances, you can reapply for a Fannie Mae-backed mortgage after two years with appropriate documentation of the circumstances. You may also qualify for an FHA loan one year after a short sale.
If your foreclosure was due to extenuating circumstances, you may be eligible to buy another home in three years. Otherwise, the standard waiting period remains seven years, notes Fannie Mae in its latest guidelines.
Similar to its short sale guidelines, FHA allows those who foreclosed on their homes to reapply for mortgages after 12 months.
A short sale may be considered to be a derogatory mark on your credit even though credit bureaus do not use the word “short sale” on your credit report. Your credit report may read “paid in full for less than agreed” or “settled for less,” among other categories. Certain HAFA guidelines allow for “no hit to credit” and can show up as paid in full.
A foreclosure is definitely a black mark on your credit and will stay with you for seven years.
Hire an Attorney to review all documents
Since short sales are complicated transactions it is recommended that you hire an attorney to review the documents. Release of lien and protection from tax deficiency are very important to your financial welfare.
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