Many people who are unable to make mortgage payments give up hope, simply assuming the bank will foreclose. This is often the worst thing you can do and is the worst possible outcome for both you and your lender. Even if you don’t want to keep the house or if there is now way to refinance or keep the home, a short sale is better than the bank foreclosing.
What is a Short Sale?
A short sale occurs when your lender agrees to allow you to sell the house for less than the outstanding mortgage balance. You find a buyer who makes a reasonable offer, the bank approves the price, and the sale goes through with the remaining balance forgiven.
Benefits of a Short Sale Over Foreclosure
There are many benefits of a short sale instead of a foreclosure, both for homeowners and – surprisingly- for lenders as well. Possible benefits of a short sale include:
- Protecting your credit.
While a short sale is still going to show up on your credit report and it is still going to hurt your credit score, it is not going to do the same level of damage to your credit as a foreclosure would.
- Avoiding a deficiency judgment.
In many cases, when a lender forecloses on a home, the lender is not able to recover the full costs associated with the outstanding loan and the foreclosure. In such cases, the lender may be able to go to court and seek a deficiency judgment against you.
A deficiency judgment is a judgment against you for the outstanding balance remaining, so you would then have to pay this money even after you’d already lost your home. When you enter into a short sale, you can make an agreement with the bank whereby they promise not to pursue a deficiency judgment, so you can eliminate the risk of significant financial loss.
- Increased flexibility and control over when you leave your home
When a bank forecloses on you, the process is out of your control. The bank will sell the home based on their schedule and the laws in your state and once the new owners take title to the property, you can essentially be tossed out of your house. When you arrange a short sale, you may have more control over the date when you leave and the conditions under which you leave. In certain instances, it may even be possible to negotiate for a small sum of money to help you with relocation.
- Avoiding legal proceedings and possible public embarrassment
Foreclosures are public record and it is likely there will be notices posted at the house, at the court or in the paper. Having to cope with legal proceedings associated with foreclosure can be frustrating and confusing, while seeing notice of your home sale in the paper as a foreclosure, can be an embarrassing experience as friends, neighbors and coworkers may find out about your financial troubles. A short sale, on the other hand, can be arranged between you, your lender and the buyer and everyone doesn’t need to know about your financial trouble.
Choosing a Short Sale
You are not the only one who shares in the benefits of a short sale. Lenders don’t end up having to incur legal expenses and don’t run the risk of getting stuck with a property they can’t sell. Lenders don’t have to pay to maintain the property until it sells, nor do they have to deal with the hassle associated with a foreclosure auction of trying to sell the home. For this reason, many lenders are eager and willing to agree to a short sale.
Choosing a short sale is always a better choice, but this is especially true through 2012 because of something called the Mortgage Forgiveness Debt Relief Act. Normally, when you have mortgage debt forgiven in a short sale, you are taxed on it. This Act relieves you of this burden so the balance of your loan that the lender forgives will not become a part of your taxable income. This is yet one more example of the benefits of a short sale when you are not able to make your mortgage payments.