6 myths about short sales
Short sales have become increasingly common since the mortgage crisis of 2008. In fact, they accounted for 22 percent of all residential sales in 2012, according to the 2012 U.S. Foreclosure and Short Sales Report by RealtyTrac, an online marketplace for foreclosure properties.
But how do you know if a short sale is the best option for you? Experts share their insights on the six most common misconceptions about short sales to help you make the right choice.
1. Your mortgage debt will be forgiven
In some short sales, lenders may hold the borrower responsible for the unpaid balance of the mortgage debt. To protect yourself, confirm with your lender that a deficiency judgment will not be sought afterwards, says Kellye Clarke, counsel to Hometown Title and Escrow in Alexandria, Va.
“They should receive that in writing from the lender, if possible, and have it be a part of the short sale approval letter,” Clarke says.
Banks have specific parameters that must be met in order to be approved for a short sale. Even if you are approved, you may still be taxed on the forgiven debt. Each state has its own laws regarding taxation of which homeowners should be aware.
2. You don’t need help to short sell your home
“Nobody should really try to do it without seeking professional help and somebody who really will be able to analyze the unique situation and take into consideration the different state laws and tax code,” says Mike Skolnick, a certified public accountant and personal financial specialist with Axiom Advisory Services in San Francisco.
Seek the help of a financial planner, CPA, real estate attorney or broker to discuss your financial situation and long-term goals.
3. Short sales have short time frames
Almost always, short sales will take longer than typical sales because they have to go through an extensive approval process with the bank and other stakeholders.
Since they have become more common, though, the length of short sales have decreased, Clarke says. “Many of them can happen in a normal time frame now of 30 to 45 days.”
But, it’s not uncommon for potential buyers to become tired of waiting for the bank to approve a sale and withdraw their offer, says Melissa King, a real estate agent with RE/MAX in Clarksburg, Md. If this happens, the seller must start the process over. Mortgage lenders require a new application with each new prospective buyer, and this process can continue for months and months, King says.
4. A short sale is a good deal for the buyer
Many buyers assume that if they look for short sales, they are looking for a bargain, King says.
That is not necessarily true, since “the bank is going to get a comparative market analysis,” Clarke says. This helps lenders ensure that the property is appropriately priced.
5. Your credit won’t be harmed
When it comes to saving your credit, a short sale is a safer option than foreclosure in most cases. But there’s also no guarantee that a short sale will not harm your credit.
“There are tax consequences and credit consequences that could come to them as a result of the short sale,” King says. “Sometimes it can have a very negative affect on people’s credit score, but not always.”
The credit score depends on how the mortgage has been structured with the bank, King says. Consult an expert to help review the particulars of your mortgage to determine the potential effect on your credit first.
6. My house is underwater, so I need a short sale
Experts agree that a short sale should only be pursued when a homeowner can no longer afford their mortgage.
But just because your house is worth less than what it would take to pay off the mortgage doesn’t mean you need to go through with a short sale.
In addition, a homeowner has to be able to prove that there are special circumstances or a financial hardship for lenders to consider approving a property for a short sale,” says Clarke.
© CTW Features