Do you owe more than your home is worth? Are you in a loan with a principle that is growing, or worse, you can no longer afford your payments?
Don’t let your home go to foreclosure, this will destroy your credit for ten years and cause you a huge tax liability. There is another option. It is called a “Short Sale”. A “Short Sale” is where the bank accepts an offer for your home from a buyer for an amount below what you owe the bank.
Why would banks accept less than owed? They are afraid of the coming “tsunami” of foreclosures that are predicted by some experts. Clearing their portfolios now, will help them survive the cost of the future losses.
If the bank accepts an offer for your home now, it takes a loss. However the loss is much less then going through the foreclosure process. First, it takes months to foreclose, depending on how the homeowner behaves, the process could leave you in the home for five to nine months or more, without you making any payments.
Then, the home needs to be readied for market, which costs both time and money. And finally, the bank sells the home for even less then they would have in the beginning, having carried the cost of the loan the whole time. It makes for a win-win if the home sells close to current market quickly, writing off any losses immediately.
Sellers must be aware, they will be 1099’ed or charged income tax on the amount of loss the bank takes. Yes, the loss to the bank is treated by the IRS as income to you, even though you never saw the money. This is likely set up after the banking industry lobbied in an effort to protect themselves from over zealous short sales or foreclosures.
So it is in the interest sellers to get the most money for the property in an effort to keep their own future tax burden low. Even with the foreclosure, the bank will report to the IRS the loss it takes, including all the repairs, commissions, interest, various fees and handling that it incurs, and the seller will pay income tax on that amount, which will be significantly more than with a short sale. So it is in everybody’s best interest to quickly sell the home for the most that can be attained.
So how does this process work? The seller simply lists the home with a broker who is familiar with the short sale process, and the offers that come in are turned into the bank with the appropriate paperwork. It is vital that you use an experienced broker who knows the process; definite landmines and pitfalls can occur if done by a novice.
The credit report will reflect a “short pay” or “settled” status, and it will have a negative effect on your credit score. However the effect will be much less than if it was a foreclosure, which is almost the worst thing you can have on your credit.
So, if you, or somebody you know is in a situation where their home is worth less than is owed, and they are thinking about letting the home go to foreclosure, warn them against it, and get them to consider the benefits of a “Short Sale”. Call Tony English of English Realty for more information. (800) 723-8676.