It’s not a “short” amount of time, as some would wish; it’s selling for short of the principle debt.
With a glut of homes sitting at values well below what they were purchased for, banks and mortgage companies are more likely to negotiate with home owners. A short sale is an opportunity for the bank to agree to a selling price below the actual principle pay off amount and forgive or mitigate the deficiency. The deficiency is the amount between the agreed selling price and the principle pay off. A short sale commonly forgives the debtors entire deficiency, but that release is determined in the negotiation between the bank and the debtor.
Creditors have their own developed list of requirements to approve a short sale contract. Most include a need for the debtor to show a financial hardship or burden that prevents them from paying the deficiency. Each of the lien holders, if there are multiple loans on the home, must approve their subjugation to the sale.
HOW DOES IT AFFECT MY CREDIT?
Should the creditor report the debt reduction to credit reporting agencies, it can adversely affect a person's credit report. After a short sale, borrowers may find it difficult to obtain a new mortgage because lender's underwriting guidelines might reject lending to a borrower who has obtained a short sale in the past. Reports from credit agencies note that a short sale could impact a person’s credit score by 150-400 points dependant on the number of late or missed payments previous to the sale. It is clear that it is easier to recover from a short sale that is negotiated without previous late payments, but conversely the debtor may not be apt to agree to the “short” without financial hardship.
As of 2011, national and state laws and industry standards for both real estate sales and lending are in an ongoing and rapid state of change. No debtor should consider entering into short sale negotiations without consulting with a mortgage professional, attorney and debt specialist.
WHAT ARE THE TAX IMPLICATIONS?
At the end of the tax year, the debtor will send a 1099-A that reflects the forgiven deficiency as income to the debtor, in short, whatever you were forgiven from in principle amount, will be reflected as income in the next tax year. The Mortgage Forgiveness Debt Relief Act of 2007 says that for foreclosures, short sales and mortgage restructurings for less than the current balance on the mortgage, there will be no tax on the forgiven debt, if...
- The debt relief was incurred between 2007 and 2009
- The debt was for purchase and improvement of the house
- The debt was secured by the borrower's primary residence
- The amount forgiven was no more than $2 Million for a married couple
Congress has moved to extend this relief through 2013 to further encourage the housing market recovery.
The Extension of Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness extends the relief through January 1, 2014. This news is a great relief to both housing professionals and home owners that are forced to sell their upside-down homes.