The foreclosure crisis in the U.S. continues with 1.9 million foreclosures initiated during the first six months of 2010 which amounts to one in every 411 homes receiving a foreclosure notice. Some geographic areas experienced rates as high as 1 in 78 homes receiving foreclosure notices. With so many homeowners facing financial hardships, more people are considering a “short sale” as an alternative to foreclosure or bankruptcy.
When most people sell their home, they usually advertise a sale price that will at least cover the balance of their mortgage. A “short sale” is where a home owner sales one's house for less than is owed on the mortgage. Because the house is sold for less, the owner will come up “short” on funds to pay-off the balance of the mortgage. The issue then becomes: what do you do about the balance that is due to the bank. Under appropriate circumstances a short sale can be a good option for a financially distressed homeowner. However, before you jump into a short sale, consult with a real estate or bankruptcy attorney to determine if a short sale is viable or helpful option for your situation.
Before you visit with an attorney, gather all of your financial records. Make a list of assets, debts, and liabilities. This information will help an attorney determine whether you can qualify for a short sale. The next step is to talk to your mortgage company. You want them to be on board with the short sale before it happens. If you short sell without your mortgage company’s approval, some states permit the mortgage company to seek a “deficiency judgment” against you. A deficiency judgment is a suit for the difference between the sale price and what is due on your note; in essence, the amount the sale was “deficient”. The result is that even though you disposed of the property, you will still have a monthly mortgage payment.
An experienced real estate attorney can help you make a compelling case to your mortgage company and explain why they should approve a short sale. The real estate attorney can explain financial hardship in terms a lender is more likely to accept including issues such as layoffs, divorce, or medical expenses. They also know how to provide the lender with required documentation to substantiate the basis for the short sale.
If your mortgage company consents to the short sale, sometimes they will also “forgive” the deficiency, instead of requiring that you pay the balance. Under the Mortgage Forgiveness Relief Act of 2007, the difference that is “forgiven” by the mortgage company may be considered income to the seller. You may be liable for the taxes on this “income” unless you establish that you were “insolvent.” You are considered insolvent under the Act if your debts are greater than your assets when your lender agreed to the short sale.
A “short sale” is just one of your options for dealing with financial hardship. If not done properly, a short sale can leave place you in a worse financial situation. Before you make a final decision and get stuck with a tax bill or deficiency judgment, talk to an experienced real estate lawyer. They will be able to assess whether a short sale will actually help ease your financial problems.