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The Pros And Cons Of Short Sale

by Brett Backues on June 28, 2012
If like many homeowners you bought at the peak of the market and put nothing or next to nothing down, you may now owe more on your house than it’s worth. Underwater on your mortgage, you may desperately want to sell. But selling for less than you paid for your home could mean you will still owe money on a property you no longer own.
However with real estate prices continuing to fall around you at a rapid rate, you feel frantic by the thought you may owe even more in the long run. So the choice is unnerving. If this is your situation, you may take some small comfort in the fact you’re not alone.
Negative equity is a real concern
The real estate website Zillow.com reports one out of every two (51.6%) U.S. homeowners who purchased when home values peaked in 2006 now owes more on their mortgage than their home is currently worth. For those who purchased in 2005 and 2007, the situation is only mildly better with nearly 42 to 45 percent facing negative equity.
"While the high rate of negative equity has little consequence to owners staying in their homes, it can be devastating to those who need to sell immediately or refinance," said Dr. Stan Humphries, Zillow's vice president of data and analytics. "The inability to secure refinancing is ultimately contributing to the growing rates of foreclosure in many parts of the country."
Should I choose a short sale?
If the sales price on your property is less than the debts and obligations you owe and you’re unable to pay the difference, you may want to consider a short sale. Before proceeding, however, consult a lawyer and tax professional. A short sale is a complex transaction which involves legal and financial risks.
Short Sale Consideration
    •    Ask yourself: Are there a number of other monies owed on the property? (such as refinance loans, contractor liens, home equity lines of credit, past homeowner’s dues, unpaid property taxes)
    •    Are you able to prove you cannot pay the loan?
    •    Know what your financial obligations will be after a short sale before you close on the sale of your home. Lenders forgiveness of debt policies and their willingness to process a short sale vary.
    •    If you have more than one loan on the property, a short sale will require all lenders’ approval.
Drawbacks
    •    Even if a lender agrees to a short sale and “releases the lien”, many will not forgive the original debt entirely. If not paid, this outstanding obligation could result in a collection action against you.
    •    Some lenders may require you have to be behind on payments before qualifying for a short sale which will have a negative impact on your credit. As a result, it could be some time before you qualify for a loan to buy another home.
    •    A short sale may be treated as taxable income. The Mortgage Forgiveness Debt Relief Act of 2007 allows an exemption to homeowners only if the cancelled debt is used to buy, build or improve a principal residence or refinance a debt incurred for this purpose.
    •    Banks may take a long time to respond to an offer of a short sale. This can be frustrating.
    •    A short sale may take several months to complete.
Benefits
    •    You and your real estate agent will be in control of the sale – as the seller, you also have the right to decline or accept a short sale offer.
    •    Having a say in who is buying your home may give you some peace-of-mind.
    •    You will spare yourself the possible social stigma of foreclosure.
    •    Your home sale will be handled in the same way as any other home sale.
    •    You may be qualified to buy another home immediately after a short sale if your payments have not been more than 30 days late and the lender doesn’t require you to pay back the loan.
    •    If your payments have been more than 30 days late but a short sale is granted, you may qualify to buy another home within two years.
For many sellers who choose to do a short sale, the possibility of buying another home in two years is a big motivator. 

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