30 Dec What is a Short Sale?
Posted at 6:46 pm in Collections by jlbworks
By Brian E. Price, Attorney
This is provided for information only. It is not to be considered as legal and/or accounting advice.
Exactly what is a short sale?
A short sale occurs when a home is sold for less money than the home is worth. The lender usually agrees to forgive any deficiency between the amount owed and the amount collected in the sale. Typically, the debt is forgiven because the lender is relieved to no longer have to deal with the property. It is vital that the details of the short sale are set forth in a contract between the parties.
What are the benefits of a short sale?
The borrower benefits from a short sale by avoiding foreclosure on the home. Expenses associated with foreclosure are very expensive. In a foreclosure, the homeowner is not only responsible for any unpaid mortgage payments but now there are the additional foreclosure costs. Second, the buyer avoids having a foreclosure listed on his or her credit. The credit report may show that the loan was not paid off in full which will hurt the homeowner’s credit score. However, no foreclosure will show up and that can make a huge difference in the future when trying to purchase a home. Future lenders are very hesitant to lend to someone with a past foreclosure.
What are the drawbacks of a short sale?
It is important for anybody considering a short sale to be aware of drawbacks. First, it will usually be noted on a credit report that the home loan was not paid off in full. More than likely, this will cause a person’s credit score to suffer but not nearly as much as a foreclosure.
Second, a short sale requires planning, time, patience, and persistence. A short sale is not an undertaking that can be done on a whim. Rather someone must carefully plan each and every step of the process.
Finally, a short sale can produce tax consequences. The amount forgiven by the lender may be considered to be income for the homeowner. The lender may send a 1099-C to the homeowner and the homeowner will provide the 1099-C to the IRS.
The Mortgage Debt Relief Act of 2007 excluded forgiven debt as being taxed as income provided the debt was on the principal residence and less than $2 million. This provision was extended to 2016 and only applies to federal taxes. The homeowner will need to seek advice from a tax professional.
Why would a lender accept a short sale?
The foreclosure process is expensive for a bank. Sales fees and commissions, legal fees, eviction fees, damage to the property, taxes, insurance, and property maintenance are costs associated with evicting someone. Most of these fees can be avoided by the use of a short sale.
Foreclosure can either be judicial or non-judicial. Tennessee is a non-judicial foreclosure state. Judicial foreclosure requires the foreclosure to go through the court system while a non- judicial does not require court approval. From a lender’s viewpoint, the foreclosure process can be very time consuming even if on the non-judicial route.
The bank is not guaranteed to receive a favorable bid once the home has been foreclosed. Based upon this fear the bank may be willing to accept a short sale offer provided the offer is reasonable.