If you're liable to pay the deficiency after a short sale, you can file bankruptcy to eliminate the debt. If you qualify, a Chapter 7 bankruptcy discharges the deficiency relieving you of the debt, while a Chapter 13 bankruptcy will usually require that you pay a portion of the total amount owed. Bankruptcy might not be a good idea if a deficiency judgment is your only debt, but it could be a good option if you have multiple debts that you can't afford to pay.
Some lenders will agree to waive the deficiency. When negotiating with your lender for short-sale approval, ask it to forgo the right to seek a deficiency judgment. If your lender agrees, this provision must be included in the short sale agreement. The agreement must expressly state that the transaction is in complete satisfaction of the debt or include similar language. If your lender refuses to waive the deficiency entirely, you can offer to settle the deficiency for a smaller amount.
Lenders are sometimes willing to agree to accept a smaller amount because collecting a deficiency debt can be a lengthy and costly process. It is often easier for the lender to accept a reduced lump sum than to try to collect the full amount.
Or, you can also negotiate to repay a reduced deficiency debt in installments over time. After the short sale is completed, your lender might call you or send letters stating that you still owe money. These letters could come from an attorney's office or a collection agency , and will demand that you pay off the deficiency.
Your lender or the collector might even try to intimidate you into making payments. But without an actual deficiency judgment from a court, the creditor can't freeze your bank accounts, garnish your wages , or place judgment liens on other property you own. To get a deficiency judgment, the creditor must file a lawsuit. But lawsuits are expensive, and many borrowers who complete a short sale to avoid a foreclosure are judgment proof.
Creditors typically sue for a deficiency judgment only if they think you have sufficient assets or funds to repay the debt. If you can't afford to pay the deficiency, it's possible that your lender won't bother to file a lawsuit. If the lender forgives the amount of the deficiency—say, as part of a settlement—and issues you an I RS Form C, y ou might have to include the forgiven debt as taxable income.
Tax laws are complicated, an exception or exclusion could save you from having to report canceled debt as part of your income. If you have tax questions, consider talking to a tax attorney. The foreclosure process is generally faster than a short sale, as the lender seeks to liquidate the assets as quickly as possible. In many cases, buying a short-sale property can be advantageous for prospective buyers.
However, it is important to be aware of some of the drawbacks involved. Short sales can take a long time, with lenders sometimes taking months to approve the transaction. After the seller's approval, it may also take many weeks for the bank to approve the price. If the bank believes that a foreclosure proceeding is more lucrative, it may reject the short sale and move forward with foreclosure instead.
A short-sale property can provide an excellent opportunity to purchase a house for less money. In many cases, short-sale homes are in reasonable condition, and while the purchase price might be higher than a foreclosure, the costs of making the home marketable can be much lower, and the disadvantages to the seller less severe.
However, because of the lengthy process, buyers and sellers must be willing to wait. An experienced real estate agent can help you determine a fair offer and negotiate with the bank.
While many investors purchase short-sale properties and quickly resell them for a profit, others choose to maintain ownership and use the property for income by collecting rent. In either case, each property must be carefully evaluated prior to purchase to determine if it has profit potential. Because tax laws are complicated and constantly change, it is always recommended that you consult with a certified public accountant CPA who knows about real estate investing and related tax laws to give you comprehensive and up-to-date information.
It can mean the difference between making a profit and taking a loss on an investment. Freddie Mac. Fair Isaac Corporation. Rocket Mortgage. A Guide To The Process. National Association of Realtors. Purchasing A Home. Home Ownership.
Real Estate Investing. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Your Money.
Personal Finance. Your Practice. Popular Courses. Home Ownership Selling Your Home. Part Of. Getting Ready to Sell. Selling Strategies. Real Estate Agents. The Owner-Seller Option. The Selling Process. Tax Consequences. Definitions A-O. Definitions P-Z. Table of Contents Expand. What Is a Short Sale? Understanding a Short Sale. Special Considerations. Short Sale vs. Short Sale Alternatives. Details of a Short Sale. Short Sale Strategies.
The Bottom Line. Key Takeaways A short sale in real estate is one in which a house is sold for a price that is less than the amount still owed on the mortgage.
It is up to the mortgage lender to approve a short sale. The difference between the sale price and the mortgage amount may be forgiven by the lender, but not always. The financial consequences of a short sale are less severe for the seller than those of a foreclosure.
It's important for the buyer to calculate costs and be sure there is room for profit when the house is resold. Article Sources. Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews with industry experts. If you're having trouble making your mortgage payments and the loan holder the "bank" has denied your request for a repayment plan , forbearance , or loan modification —or if you're not interested in any of those options—two other ways to avoid a foreclosure are completing a short sale or a deed in lieu of foreclosure "deed in lieu".
One benefit to these options is that that you won't have a foreclosure on your credit history. But your credit score will still take a major hit. A short sale or deed in lieu is almost as bad as a foreclosure when it comes to credit scores.
For some people, though, not having the stigma of a foreclosure on their record is worth the effort of working out one of these alternatives. Another upside is that some banks offer relocation assistance—often a thousand dollars or more—to help homeowners find new housing after a short sale or deed in lieu. Read on to learn how short sales and deeds in lieu work, the differences between the two, and the pros and cons of arranging one of these options to prevent a foreclosure.
A short sale occurs when a homeowner sells the property to a third party for less than the total mortgage debt. With a short sale, the bank agrees to accept the sale proceeds in exchange for releasing the lien on the property. The bank's loss mitigation department must approve the short sale before the transaction can be completed. To get approval for a short sale, the seller the homeowner must contact the loan servicer to ask for a loss mitigation application.
The homeowner then must send the servicer a complete application, which usually includes:. The purchase offer. A short sale application will also most likely require that you include an offer from a potential purchaser. Banks often insist that there be an offer on the table before they'll consider a short sale, but not always.
A second mortgage holder must agree to the short sale. If the property has one mortgage on it, like a first and second mortgage, both loan holders must consent to the short sale. The first mortgage holder will usually offer a certain amount from the short sale proceeds to the second mortgage holder to release their lien. But the second mortgage holder can refuse to accept the amount and kill the deal. Many homeowners who complete a short sale will face a deficiency judgment, though a few states disallow them after this kind of transaction.
The difference between the total debt and the sale price is called a " deficiency. In many states, the bank can seek a personal judgment against the borrower after the short sale to recover the deficiency amount. While many states have enacted legislation that prohibits a deficiency judgment following a foreclosure , most states do not have a corresponding law that would prevent a deficiency judgment following a short sale. California is an example of a state with specific legislation prohibiting a deficiency judgment following a short sale—but most states have no such prohibition.
To ensure that the bank can't get a deficiency judgment against you following a short sale, the short sale agreement must expressly state that the transaction is in full satisfaction of the debt and that the bank waives its right to the deficiency. Avoiding a deficiency balance is the main benefit of a short sale. If you can't get the bank to agree to waive the deficiency entirely, you might try negotiating a reduced deficiency amount.
If the bank forgives some or all of the deficiency and issues you an I RS Form C, y ou might have to include the forgiven debt as taxable income. Another way to avoid a foreclosure is by completing a deed in lieu.
A deed in lieu is a transaction in which the homeowner voluntarily transfers title to the property to the bank in exchange for a release from the mortgage obligation. One benefit to a deed in lieu, unlike with a short sale, is that you don't have to take responsibility for selling your house. Generally, a bank will approve a deed in lieu only if the property isn't subject to liens other than the mortgage.
Because the difference in how a foreclosure or deed in lieu affects your credit is minimal, it might not be worth completing a deed in lieu unless the bank agrees to:. Banks sometimes agree to these terms to avoid the expense and hassle of foreclosing. If you have a lot of equity in the property, though, a deed in lieu usually isn't a good way to go.
0コメント