What is a Short Sale?
Many homeowners bought their houses because they thought they would be staying there for a long time, if not forever, but then something happened
Homeowners forced to move due to some unforeseen or unexpected events, like job relocation or reassignment, divorce, death, or maybe financial difficulties.
They will have to put their house on the market when they move, which is not as easy to do now as is was before because of housing prices falling.
Home values have been dropping in some regions over the past year. It has dropped low enough that many homeowners cannot profit sufficiently to payoff the mortgage as well as cover the closing costs.
With the prices down, what happens could be either default, wherein the homeowner walks away from payment obligations, bankruptcy, or maybe foreclosure. All of which can severely impact your credit rating for a long time.
A good option that has a considerable lower negative impact on your credit would be a short sale.
A short sale is when the lender agrees to accept a mortgage payoff that is less than outstanding loan.
Typically, banks or lenders would not want to do that, but the foreclosure is often a long and expensive process. Banks are under strict regulations and if a certain percentage of their outstanding loans are considered bad debt, they can be fined and sanctioned. So, banks are actually eager to get rid of the property, so long as it does not hurt them more if they do a short sale.
If the borrower is truly going through financial difficulties, in order for the lender to agree to a short sale, you must furnish documents that will prove your hardship, like financial statements, tax returns, pay stubs, medical bills, stocks, bonds, divorce decree, etc. Along with your financial statements, you will need to write a "Hardship Letter" which explains why you can no longer pay the mortgage in detail.
These documents will not be enough to get the lender's approval for the short sale. The homeowner will have to put the house on the market and sell the property. Once you do, you will need to provide additional documentation. You will need to provide a copy of the comparative market analysis, a copy of the purchase agreement, and a net sheet which shows the net or loss from the sale of the property.
The forgiven debt is considered taxable income, and therefore, will be reported to the IRS
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