Short Sale versus Foreclosure
A “short sale” refers to a situation where the property owner does not have enough equity in the property and not enough cash or liquid assets to be able to sell the property, pay off liens and selling expenses (e.g., closing costs, property taxes, transfer taxes, real estate commissions) and provide a clear title to the purchaser. In other words, there is more owed on the home than what it will likely sell for on the market. A short sale can also occur to a seller who bought high and took out a lot of equity and might be forced to sell due to a divorce or job transfer.
If a homeowner facing foreclosure cannot negotiate with the lender to work out a repayment plan or loan modification, a short sale can be a viable option. Many consider a short sale better in the long run for the homeowner because it avoids foreclosure which will damage a person’s credit score and make it much harder to buy another home in the future.
According to Beth Llewellyn, CEO of the Partnership for Homeownership, a foreclosure will stay on the credit report for at least 10 years as it is a court action similar to bankruptcy. However, foreclosure can do even more damage to a credit report than bankruptcy. Ultimately you must prove to the lender that the foreclosure happened due to something beyond your control such as job loss or illness.
“It’s ideal if the homeowner who chooses to sell can work with a professional REALTOR® before they are delinquent three months,” says Llewellyn. “Within this short window of time, a REALTOR might assist in negotiations with the lender to place the property on the market and possibly save the buyer any equity left, as well as prevent a foreclosure on their credit file.”
- Beware of scams!!! Consumer groups have learned that advertisements that say “Cash for Houses/Any Situation” or “We Buy Houses for Cash” bait homeowners with the promise of rescuing them from imminent foreclosure. Unfortunately, the “rescue” often involves the borrower signing over title of the house to a different person or entity, thus, and the family ends up being evicted from their home.
- It is important that sellers work with a licensed Illinois Realtor to sell their home. REALTORS are in the business of helping homeowners and have the expertise to guide them through a tough situation. A REALTOR has the expertise to develop a reliable Comparable Market Analysis (CMA) to determine the current fair market value of the home.
- Understand the tax implications of the decision to sell short and consult with a tax advisor. See Realtors Applaud Elimination of "Phantom Tax" further in this article.
There will be paperwork and research required of you in this process. First you have to locate your mortgage documents to understand the terms of your loan. If you have authorized an attorney or REALTOR to act on you behalf in the sale of your home, the lender will need a letter of authorization. Other documentation required by the lender includes:
- Financial Disclosure Form
- One-page “hardship letter” explaining how you got in this position
- Last two months pay stubs
- Copies of most recent two months personal checking account statements for each borrower on the loan
- Copy of signed last two years’ personal tax returns
Yes, the short sale will require time and consultation with the appropriate legal, tax and real estate professionals. It can take from two weeks to as long as 60 days to receive an approval of a short sale from a lender. But usually it’s a much better option than foreclosure given the impact to your credit history.
The National Association of REALTORS has been working for the past nine years to repeal the “phantom tax” law that forces individuals to pay income tax when a portion of their mortgage loan is forgiven after a short sale or as part of a foreclosure. The REALTOR-supported measure, the Mortgage Forgiveness Debt Relief Act of 2007 was signed into law by President Bush on December 20 and will ensure that any debt forgiven on disposition of a principal residence will not be taxed.
Sources: Partnership for HomeOwnership, Illinois Association of REALTORS®, National Association of REALTORS®, REALTOR® Will Weaver of the Floyd Wickman Team