In this volatile economy, foreclosure rates are sky rocketing. For a home owner, their last chance at avoiding a foreclosure is a short sale. For the buyer, that can be tough situation to move into. The decision to put an offer on a home that is being sold as a short sale can be confusing. Researching a short sale before making an offer is a wise decision.
A short sale simply means that the home will be sold at a price that is short the amount of the current mortgage note. Typically this occurs when the home owner falls behind in their payments and they are trying to sell the house before a foreclosure takes place.
How Does a Short Sale Work?
Typically the owner is selling their home with a real estate agent at a price lower than the cost of the current mortgage. When an offer is entered in for the purchase of the home, it must be presented to the bank for approval. The bank will then decide if the price is acceptable or if they will counter at a high rate.
The bank will be losing money by not getting the full price of the loan but in the current market, a short sale is preferred over a foreclosure where the home sits empty for months.
What can you expect?
If you are interested in purchasing a home through a short sale and choose to make an offer on that home, be expected to wait on the process to proceed. An approval from the bank can take 1-3 months, sometimes longer. That is not an easy time to sit in limbo when you are hoping to buy a home. Proceed with caution and with the assistance of a real estate agent when you are considering a short sale home.
As the owner, expect to produce a number of documents as to why the a short sale is to everyone’s benefit. Your lending institution will request copies of bank statements, a list of assets and liabilities, a letter about your situation and why you can no longer afford to pay for your home and more.
Depending on the state you live in, as the home owner, a short sale could increase your tax liability. Since the enactment of the Mortgage Debt Relief Act of 2007, the debt that is canceled my your lender can become taxable income. That is to say that if your loan is for $200,000 and the sale of your home goes through at $150,000, your taxable income could increase by the $50,000 difference due to your short sale. (For more information on the Mortgage Debt Relief Act of 2007 visit the IRS website.)
A short sale can be a relief to the homeowner that is hoping to avoid a foreclosure and move forward during what is most likely a difficult time. And for the buyer who is willing to wait out the process, it can mean an opportunity to get a great home at a reduced price.