A Short Sale is an alternative to bankruptcy or foreclosure proceedings such as your home being sold, by your lender, at the county courthouse steps. With a Short Sale transaction, the lender has agreed to accept less than the total amount owed. Some lenders will not agree to a Short Sale because they prefer to take possession of the home and then sell it. Per the Mortgage Forgiveness Debt Relief Act of 2007, the IRS can consider debt forgiveness as taxable income.
Buying or Selling a home via a Short Sale can be complex and involve a lengthy process such as several months. A Seller will be required to provide documentation that they qualify for a Short Sale. Items would include:
- Net Sheet – Closing Statement showing the Sales Price minus your loan balance, real estate commissions and other closing costs. This will show the lender the amount of funds they would receive from this Short Sale. Basically it will show the size of their loss.
- Hardship Letter – A lender may be sympathetic if you lost your job or had major medical expenses. A lender may not be sympathetic to over spending on items such as vehicles, vacations, etc.
- Proof of Income and Assets – the Lender wants proof that you do not have the ability to pay back this loan.
- Appraisal – The Lender want to verify that the Sales Price is reasonable.
Will a Seller selling a home via a Short Sale hurt his/her credit? Yes, it will hurt your credit to the point that you will not be able to purchase a home for at least 2 years. Mortgage companies are very concerned when they review credit reports and discover that a borrower has not paid as agreed on a previous home loan.
A Short Sale for a buyer using the KC Dream Home Program or attempt to purchase a foreclosed property normally doesn’t work because lenders typically are unwilling to pay for repairs and for liability purposes, do not allow the buyer to do repairs before closing. Some FHA loan products permits a buyer to escrow money for repairs to be made after closing.
It is important to talk to your tax accountant and real estate attorney before buying or selling a home via a Short Sale. Any questions or comments are welcomed! If you are interested in buying or selling a home North of the River, we would be glad to show you our marketing plan. We can guide you through the process. Thank you!