A common misconception is that if you cannot afford your mortgage your only option is to go into foreclosure and lose your home. Foreclosures can be long, stressful, and cause tremendous damage to your credit. If you want to avoid these issues, an alternative is doing a short sale.
Now you're probably wondering, what is a short sale? Essentially, short sales involve selling a property for less than what is owed on it. While short sales also have disadvantages, they are significantly better than foreclosures.
The first step in starting a short sale is when the home owner defaults on their loan by missing payments. It's important to have good communication with your lender if you're having financial issues because it is ultimately their decision whether or not a short sale will take place.
Generally the home owner has to initiate the short sale process by requesting it from the lien holder. This is generally via a drafted document explaining why they're requesting a short sale and any other pertinent information. If the lien holder feels that a short sale is the best option, then the short sale can now take place.
The lien holder usually takes a loss from a short sale but it's a way of fixing the issue quick and getting as much from the property as they can. It's important to remember that the actual sale takes place between the buyer and the lien holder. The home owner has no say in the price that the home is sold for or who it is sold to.
Once the transaction between the buyer and the lien holder has been complete, the ex-home owner's obligations aren't necessarily over. If the property sold for less than what was owed, the lien holder has to report the difference to the IRS as "forgiven debt".
The IRS considers this as income for the former home owner and they may have to pay taxes on it. That's one of the downsides of a short sale. And there is no guarantee that the lien holder will forgive the debt.
Some contracts stipulate that the home owner will be responsible for any uncollected amount from the sale so make sure you read and understand the agreement BEFORE you sign.
In a perfect world, nobody would struggle and layoffs and medical conditions wouldn't exist. However, we don't live in a perfect world and sometimes we run into financial issues.
When you're a home owner, financial issues can potentially cause you to lose your investment. If you lose your job or run into medical issues and get behind on your mortgage payments, you have a decision to make.
Do you default on your loan and get foreclosed on? Or do you try to minimize damages and do a short sale. If you're just going through a rough time and plan on things getting better, a short sale will help you get rid of the mortgage obligations while keeping damage to your credit at a minimum.
So eventually when you try to buy another home, you may still have a little trouble getting another mortgage but it will be much easier than it would have if you have a foreclosure on your record.
When doing a short sale, it's important to know exactly what you're getting into and realize that there are consequences to doing it. If you feel uneasy or intimidated by a short sale, don't hesitate to consult a lawyer.
You will be signing legal documents so make sure you fully understand everything that you're signing. Understanding what a short sale will save you stress and aggravation later on.