Minimize financial exposure/liability: In many foreclosure situations, the lender will ultimately sell the property at a significant discount once they foreclose and repossess the property. The homeowner can then be financially liable to the lender. While the same may be true with a short sale, the difference is with a short sale the homeowner is still involved in the process and can therefore contribute their input and have more control over the sale price of the property and the potential associated liabilities. In a foreclosure, however, once the lender repossesses the property, the homeowner is typically defenseless with respect to what follows next.
Closing costs are not paid by the homeowner, it is factored into the price approved by the lender.
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Your friend is incorrect. Your lender will report to the credit bureaus that your mortgage was "Settled For Less Than Agreed Amount" or similar language. This account will be considered derogatory and remain on your credit report for seven years after the date of last activity. A forelcosure is a public record and will remain on your credit report for 10 years after final judgment.
A pay off for less than agreed amount will be a red flag to any mortgage underwriter in the future and be regarded as a foreclosure because your lender took a loss.
Just this month, Fannie Mae and Freddie Mac extended the length of time borrowers must wait after a cured foreclosure from 4 years to 5 years on a primary residence or 7 years on a vacation home or investment property.
Closing costs can go either way. Your lender might agree to pick up some of the buyer's closing costs or not, depending on how much of a loss the lender takes and how the lender will compensate their investors. A Realtor who specializes in short sales could give you better guidance on that issue and probably help you obtain a better deal from your lender than you could on your own.
It is always a good idea, especially if your situation is complicated and you have other assets, we also advise you to consult your attorney and/or financial consultant.
Remember that your Realtor will work for you and the bank will essentially be paying his or her commission. Banks do not want to own homes, and they are not in the business of selling homes, so they will hire a Realtor anyway. Usually they will agree to work with a Realtor you select.
As an alternative, if you are staying in the area, try to work out a lower interest rate and more favorable payment schedule with your mortgage lender.
However, if this is not an option, talk to your mortgage lender about listing the home for sale for the market value, which is below the mortgage amount. Most banks will work with you to approve your listing the house under these circumstances. Be sure that your listing clearly indicates that "3rd party approval" is required (meaning the mortgage lender) because you cannot independently accept a buyer's offer to purchase your home. The mortgage lender will also have to approve the sale.
A short sale of a home where you reside will be much less damaging to your credit than the alternative of a foreclosure where the bank actually goes through the more costly court process to take possession of your home. This more adversarial process is also more damaging to your credit report and will be on your credit report for 7 years. By the way, if this is not your main residence, and you are an investor owner, the IRS will tax you for the difference between what you owed on the mortgage and the sale price as income to you.
The bank may ask or require you to pay part of their costs in selling the home depending on your ability to do so.
Good luck to you. Many people are facing similar circumstances, but it is never quite the same as when it is happening to you. Our sincere and heartfelt thoughts are with you and all the homeowners in your very difficult situation.
Short Sales are Foreclosure alternatives. Being an "alternative" doesn't mean it's better. The truth about Short Sales is that they are treated much like a Foreclosure. In fact, Short Sales have very specific concerns that you will need to address with an Attorney and or CPA before you decide to do one. Let me share some of those now.
1. The lender can sue you and obtain a judgment against you for the difference in the amount paid off and amount owed. For example, if you sold your home 30,000.00 short, the bank can go to court and obtain a judgment. This judgment against you typically opens all your assets, boats, cars, homes, jewelry, checking and saving accounts, etcâ€¦. to be pursued by the debt collectors. For further details on what these judgment can do to you, you should speak with an Attorney in your state.
2. You may hear from some people that if the back decides to write off the difference then that 30,000.00 (in my example) would be considered income and you would be sent a 1099 Tax Form because, as income you owe taxes on it. This isnâ€™t always true as of The Mortgage Forgiveness Debt Relief Act of 2007. Obviously, for further details on this Act and the implications it may have on your specific situation, you will want to speak with a CPA or Attorney.
3. The credit report takes a hard hit. 2 years for recovery isnâ€™t always the case and here is why. Yes, you will take a huge hit on your FICO, typically 350+ point drop. So, if your credit was 800 (really good) and you take a 350 hit, that drops you to 450 which is really bad, really bad! The other thing to remember is that your credit report obtains a public record and it will be recorded for all to see (especially future lenders) that you were not able to pay back a mortgage and in fact, you completed a â€œShort Saleâ€.
For many people Short Sales are the only alternative however, I highly, strongly, fanatically implore you, talk to your lender and do all you can to work it out! It just isnâ€™t worth it, if you can avoid it.