A short sale can be a viable alternative to foreclosure or a way to escape an upside-down mortgage. However, getting your bank to agree to a short sale does not guarantee cancellation of your debt, nor does cancellation of your debt mean you're out of the woods, tax-wise, depending on your situation.
The Short Sale Defined
In most instances, a short sale occurs when your mortgage holder agrees to a sale of your home for less than the amount you owe on it, with the caveat that the remainder of the loan will be forgiven. Many lenders prefer short sales to foreclosures simply because the mortgage may be less than the financial outlay for the legal proceedings and property management costs associated with a foreclosure.
Debt Cancellation and Short Sales
Most lenders will not agree to a short sale when there is any possibility of recouping the full amount or most of the balance of the mortgage owed. For that reason, a short sale with cancellation of debt is rarely an option until the homeowner is already in arrears and other mortgage modification efforts, such as negotiation of lower payments, have been exhausted. In other words, unless you are already behind on your mortgage and there is no chance of selling the home for the entire balance owed, you may not qualify for cancellation of debt as part of a short sale.
Understanding the Short Sale Process
While a short sale may allow a financially distressed homeowner and the mortgage lender some resolution to an expensive problem, short sales are not for unmotivated homeowners. Most of the legwork involved in a short sale falls to the homeowner. Getting an appraisal and finding a buyer or placing the home with a realty company will be up to you. Since lenders will require proof that you have no foreseeable ability to repay the debt as agreed, you may be required to provide a statement of hardship, including proof of your income and assets -- or lack thereof -- before discussing a short sale. If you have multiple mortgages with multiple lenders, all lenders will have to agree to the sale and to forgiveness of your debt. You may also be asked for proof that a sale is pending in the form of a real estate agent's contract with a potential buyer or a contract you negotiate with a potential buyer. Don't be surprised if your lender requires this contract to include a deposit or earnest money.
Guaranteeing Debt Cancellation
Debt cancellation as part of the short sale should be negotiated before the sale takes place. Since some states allow lenders to pursue collection attempts for the balance owed on a mortgage discharged through a short sale, you will need to get your debt cancellation agreement with your lender in writing before the short sale is completed. An attorney can help you assure your debts will be discharged as part of the short sale.
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