Everyone COULD win on home 'short sale' |
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"If they're just having a short-term problem
-- short-term disability or maternity leave or layoffs, but they
have good prospects to find something soon and they can weather
the storm and hold onto the profit through that -- obviously they
wouldn't want to think about a short sale," says Lohrenz.
"But if the choice is foreclosure or short sale,
generally a short sale is going to be a better idea."
Before you think about asking your lender to consider
a short sale, it would be a good idea to get your paperwork lined
up.
Be ready to document your need and to show the lender
you are serious about your situation, including a hardship letter
(an honest explanation of your financial situation and how it occurred),
pay stubs, bank statements, tax returns, an appraisal and documentation
of your debts.
3 critical safeguards
If you're considering a short sale, experts advise you to take the
following steps to meet potential negative consequences head-on.
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| 3 critical safeguards: |
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| 1. |
Get it in
writing. |
| 2. |
Protect
your credit. |
| 3. |
Work with
a tax pro. |
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Get it in writing. Make
sure the lender agrees in writing that the short sale will absolve
all debts.
"If they owe $300,000 on the house and the short
sale is for $280,000, is there any possible way that the lender's
going to come after them for the $20,000?" Lohrenz says. "Most
lenders will put that in the agreement that they're not going to
come after the deficiency."
Protect your credit rating.
Ask the lender how it will report the short sale on your credit
report.
"Most of the time, a short sale shows simply
that a debt is satisfied," says Lohrenz. "But theoretically,
a short sale could reflect on the credit report as 'settled for
less than the full balance.'" Such a designation is a negative
mark on your credit report, though it wouldn't hurt your credit
as much as a foreclosure would.
Get professional tax advice.
Short sales often have tax repercussions since lenders can claim
the forgiven debt as income that they provided you.
That means if you agreed to a short sale for $50,000
less than what you owed the lender, the lender could issue you a
1099 for $50,000, which you would have to pay taxes on.
But there are two "outs," says Lohrenz.
"If you meet the IRS's definition of insolvency at the
time the debt was forgiven, then you generally don't have to pay
taxes on it."
Or, if your home loan is a non-recourse loan, you're
also likely to escape this tax. With a recourse loan, whoever signed
the note is personally liable for the debt, and in a short sale,
the debtor would have to pay tax on the difference. A nonrecourse
debt is one secured by the loan collateral -- such as the house
itself -- and the debtor would not have to pay tax on the sale shortfall.
The most common case is that mortgages secured by
the property -- especially for buyers who made a 20 percent or more
down payment -- is a nonrecourse loan. But it is absolutely critical
you consult a tax attorney before you make such a move to ensure
that you don't dig a deeper financial hole as a result of the tax
situation.
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