Do you owe money after a short sale?
If the seller agrees to the short sale, you will not owe anything more on the loan. However, you may have to pay income taxes on the part of the loan that is forgiven. The IRS may treat the amount forgiven as income to you but there are rules that may allow part or all of the cancellation of the debt.
A short sale can help you get out of an underwater situation, but you won't profit from the sale, and it'll impact your credit score for some time. This can make it harder to obtain credit in the future.
Short Sale Drawbacks For Sellers
Lack of profits: Since a seller owes money to the lender, they won't receive any of the proceeds of the sale of their home. Credit score damage: A short sale can do real damage to a seller's credit score. The higher your credit score, the larger the hit.
A short sale usually indicates a homeowner in financial distress, a real estate market in the doldrums, or both. The short sale must be approved in advance by the mortgage lender. The mortgage holder may be required to pay the shortfall or the debt may be forgiven.
Short sales, like foreclosures, can remain on your credit report for as long as seven years. The silver lining with short sales is that your score is likely to begin improving more quickly, usually in about two years.
Although the lender might agree to release its mortgage lien in exchange for the short sale proceeds, it might not release you from personal liability on the debt. So, if state law allows it, the lender could potentially come after you for the deficiency.
Yes. There is no way to avoid the damage a short sale does to your credit score. A short sale can knock as much as 160 points off your credit score, but the level of damage heavily depends on your credit standing before the short sale and how much your lender gets in the sale, among other things.
From a lender's perspective, it's better to recover a portion of a mortgage loan than to absorb a total loss. Therefore, in lieu of a foreclosure, banks will often settle for a short sale. This allows both the lender and the homeowner to end up in a better position.
If this happens, a short seller might receive a “margin call” and have to put up more collateral in the account to maintain the position or be forced to close it by buying back the stock. Given the market's long-term upward bias, many investors find it hard to short stocks and achieve consistent, profitable results.
A seller opens a short position by borrowing shares, usually from a broker-dealer, hoping to repurchase them for a profit if the price declines. The investor then sells these borrowed shares to buyers willing to pay the market price.
Who pays for short selling?
The short seller usually must pay handling fee to borrow the asset (charged at a particular rate over time, similar to an interest payment) and reimburse the lender for any cash return (such as a dividend) that was paid on the asset while borrowed.
Buyers of a short sale should be prepared for the possibility of structural problems, pest infestations, or any number of potential issues that might end up driving up the home's cost over time. Keep in mind that there's also no guarantee you'll know what the home's problems are upfront.
Short selling involves borrowing a security whose price you think is going to fall and then selling it on the open market. You then buy the same stock back later, hopefully for a lower price than you initially sold it for, return the borrowed stock to your broker, and pocket the difference.
Be Relentless in Short Sale Negotiations
Be aware that the bank isn't forced to agree to anything. Ask for every agreement to be in writing, but don't be surprised when you don't get it. Make notations and keep a record of every conversation, with whom, and the date and time. You may need it in court.
A short sale can get a homeowner out from under a high-debt home. These sales can offer good deals to home buyers and sellers alike. Homebuyers looking for a good deal on a property purchase can get a price break on a short sale - if they understand the short-sale process completely.
This is one area where you might even see things move more quickly if you work with the existing lender. The short sale paperwork includes most of the information they need for a loan, so you might be able to get a fast approval from the existing lender.
Short sales give people the option to repurchase another home fairly soon; foreclosures have a much more negative impact on a borrower's credit score .
| Loan Type | Waiting Period After Foreclosure |
|---|---|
| Fannie Mae/Freddie Mac | Generally: 4 years, Extenuating circ*mstances: 2 years |
| FHA-Insured | 3 years (Generally, subject to some exceptions) |
| VA-Guaranteed | Likely 2 years |
| Other Kinds of Loans | Varies |
There are several reasons why banks reject short sales but the three most common reasons that disqualify a property for a short sale are comprised of an initial offer price that is very low, disqualification of the property seller for the short sale, or disqualification of the buyer for the short sale.
A short sale will remain on your credit report for seven years. The starting point for this period depends on the timeliness of your mortgage payments. If your payments were never late and the account was in good standing at the time of the short sale, the period begins on the date of the sale.
How do I remove a short sale from my credit report?
If the short sale was preceded by one or more late payments, the seven-year timeline starts with the date of first delinquency that led to the short sale. If you never missed a payment, the mortgage account will fall off your credit report seven years after your account was reported as settled.
If you engage in a short sale or your mortgage lender forecloses on your home, the Internal Revenue Service treats it just like a sale. Foreclosures and short sales may also require you to recognize ordinary income if the lender cancels any of your outstanding mortgage balance and you're ineligible for an exclusion.
Put simply, a short sale involves the sale of a stock an investor does not own. When an investor engages in short selling, two things can happen. If the price of the stock drops, the short seller can buy the stock at the lower price and make a profit. If the price of the stock rises, the short seller will lose money.
There may be heavy losses, difficulty in timing the market, and a need for a margin account. These are the common disadvantages of short selling.
For many sellers, though, the chance to buy another home in two years is the real motivation to do a short sale. Some sellers qualify immediately to buy again under certain terms. Good credit behavior can supplant bad credit after two years, even though the derogatory will remain.
