Homeowners unable to afford their mortgage payments can sometimes negotiate an agreement with lending institutions to sell their home for less than their mortgage debt — preventing foreclosure, a harrying process for both lenders and sellers — and, in many cases, absolving debt while preserving credit.
“Both short sales and foreclosures are considered ‘negative information,’ so they stay on the credit report for seven years,” said Patricia Guertler of Consumer Credit Counseling Services (CCCS), a nonprofit organization offering free counseling to homeowners. A foreclosure, however, is more damaging to credit than a short sale, she said.
While a short sale is still a mark against a homeowner, “credit is something that can be rebuilt — and if the damage is only on the mortgage and if [the homeowner is] in good standing, it is not going to destroy credit completely. … It will drop your credit score but not [to] the point where it is completely irreparable,” Guertler said.
For a short sale to proceed, the homeowner’s lenders must accept the buyer’s offer. Lenders may refuse a short sale, particularly when a homeowner is behind on payments and the lender has taken steps toward a foreclosure.
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And sitting on one’s hands, waiting, is exactly what some professionals say is the last thing a homeowner should do.
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Though executed more quickly than foreclosures, short sales are time-consuming — for lenders, homeowners and real estate agents. To hurry the process along, . . . . . make sure paperwork is organized and submitted in a way that will get the sale approved.
“If one page is filed incorrectly, it can cause the whole short sale to be thrown out. So it is very meticulous work,” he said.
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Short sales take longer than standard sales — anywhere from 30 to 180 days, Herzberg said. In part, the process drags on because necessary procedures such as home appraisals take time. The appraisal alone can take 10 to 17 business days, Knight said. Discussions between the many players involved — homeowners, real estate agents, banking institutions, mortgage insurers, investors and others — also take time.
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When lenders do approve a short sale, sites such as MSN Money.com advise homeowners to safeguard themselves by procuring an agreement — in writing — that the sale absolves their debt. Jose Romero of Plaza Real Estate in San Jose, who has a short-sale listing in Menlo Park, has observed lenders requiring repayment. “Some banks issue what they call a ‘soft note,’ … basically a balance that the borrower would carry after they settle on the transaction,” Romero said.
After successfully cancelling thousands of dollars of debt, a homeowner may rejoice — only to discover that, to the Internal Revenue Service, the forgiven debt represents taxable income.
If you want to pursue a short sale on your home, we can help.
Contact us at 804/719-1489, or submit our short sale form to start the discussion on a short sale.