In Mortgage Trouble? A House Short Sale Might Be the Answer

12-Apr-2010 As foreclosure rates are continuing to climb, it appears that there is no relief in sight for homeowners who are “upside down” in their mortgages, meaning they currently owe more on their home than it is worth. However, many lenders are now considering short sales before borrowers get to foreclosure.

What is a short sale? A house short sale is when you sell your property at a loss, and the lender agrees to take less for your home than you currently owe on it.

Why does it make sense? House short sales, in the current economic climate, make a lot of sense for both borrowers and lenders. Here’s why –
• Saves time and legal fees for both parties by avoiding the pricey foreclosure process.
• Less impact on borrower’s credit score than a foreclosure. A short sale will appear on a credit report as a settlement, which is significantly less damaging than a foreclosure.
• Smaller financial loss for lender than if the borrower continues to default on their mortgage and the property is ultimately foreclosed on.

What is the difference between a short sale and a foreclosure? A foreclosure is forced by the lender due to nonpayment of debt, whereas a short sale is mutually agreed upon by both parties.

Do I have to have my lender’s approval before acceptance of an offer? Yes. Most lenders now have entire departments made up of loss mitigation specialists that will either approve or deny this request based on pre determined criteria.

What happens to the mortgage balance? It depends on the lender, and the way the short sale agreement is structured. Junior lien holders (second mortgage and home equity line of credit holders) may also need to approve the short sale. For this reason, any house short sale contract is contingent upon approval of the short sale by the lender.

What are the tax implications of a short sale? Generally speaking, when a lender forgives or cancels a debt owed by you (such as in a short sale) the cancelled amount may be taxable. The lender is required to file a 1099-C with the IRS, reporting the amount of the cancelled debt which you will subsequently be taxed on. However, under the Mortgage Debt Relief Act of 2007 the cancelled debt is not taxable on your principal residence in most cases.

While a short sale is a great option for those who qualify, there are rules and regulations like the Mortgage Debt Relief Act of 2007 that should be explained by a professional before proceeding. Additionally, short sales have a high failure rate and are sometimes delayed from closing in time to prevent foreclosure when they are not handled by a qualified professional. If you are considering a house short sale, it makes sense to contact a real estate attorney to discuss your options.

The attorneys at Chang and Carlin LLP have extensive experience with short sales and can advise you on a house short sale or foreclosure depending on your situation. Contact us today for a FREE Legal Evaluation.

Chang and Carlin
The content found on the Chang & Carlin site is not legal advice and is purely for informational purposes. The information contained herein is not a substitute for the advice of an attorney and does not create an attorney-client relationship. If you are interested in obtaining information about chapter 7 bankruptcy, chapter 13 bankruptcy, foreclosure services, real estate legal services, you are encouraged to call our law firm at 866-790-8601 or Request a Free Legal Evaluation. Chang and Carlin serves clients in Chicago, Schaumburg, Joliet, Warrenville, Waukegan, Illinois.

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