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When to Do a Short Sale and Avoid Foreclosure
Author David Schneider | Dec 31,2007
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People experience financial hardship for a variety of reasons. Losing a job, becoming ill or injured, going through a divorce or overextending with too much debt are common reasons people get behind in their mortgage payments. Many homeowners today are feeling the pinch when adjustable rate mortgages reset to higher rates. If you are behind on your house payments, you may believe that foreclosure is your only way out. However, there is another alternative, called a short sale.
A short sale occurs when your home sells for less than what you owe on the mortgage. This enables you to get out of a home you can no longer afford without going through the process of foreclosure. While neither foreclosure nor a short sale will solve your financial problems, it can be helpful to understand the differences and decide when a short sale is a good option.
What Happens in Foreclosure
Foreclosure is a process undertaken by your lender when you stop making your scheduled mortgage payments. First your lender will serve you notice that that they intend to foreclose. If you have no legitimate reason to dispute the charges and can’t come up with the cash to satisfy the outstanding payments, an ad goes in the paper to notify the public of the foreclosure sale of your property. If you have not vacated the property by the date of the sale, law enforcement officers may forcibly remove you and your possessions from the home.
Following the foreclosure sale, your credit rating will suffer a tremendous drop. The cost of borrowing money will likely be extremely prohibitive. You may even have to consider filing for bankruptcy.
Adding insult to injury, if your home sells for less than what you owe, you may even owe federal income taxes on the difference. Your wages could be garnished for as long as it takes to satisfy this amount!
Going through a foreclosure is draining, financially and emotionally. It can take years to recover the stability you and your family once enjoyed. If you are not prepared to deal with the issues of foreclosure, you may want to consider doing a short sale. Understanding when to do a short sale can help you avoid the embarrassment and disruption of the foreclosure process.
When to Do a Short Sale
A short sale will help you avoid foreclosure, but you should understand how short sales work to decide if you wish to proceed with one. A short sale can be a complex and time-consuming process that is difficult to handle on your own. You will probably want to involve a financial adviser and lawyer to help you avoid some of the pitfalls of the process.
The key feature of a short sale is that your home will sell for less than what you owe on your mortgage. Let’s say your house sells for $50,000 less than your mortgage balance. You need to find out if your mortgage lender will expect you to pay this amount of money back to them.
You also need to find out if you will be required to pay income taxes, transfer taxes, real estate commission and closing costs on this amount. A short sale can be a good option if your lender agrees to forgive the difference, and if you will have the funds available to pay any associated taxes or fees.
When to Avoid a Short Sale or Foreclosure
When you’re on rocky financial ground and worried that you may lose your house, acting quickly can help you avoid a short sale or foreclosure. The key is to address the situation before your lender decides to foreclose.
If your financial troubles are short-lived, and you believe you can get back on your feet, you may consider contacting your lender and asking for a brief period of leniency. If a foreclosure or short sale seems imminent, refinancing may be another option. If the market has improved since you took out your mortgage, you may be able to keep your house and get some breathing room back into your budget.
Another option when a short sale or foreclosure is looming is to consider selling your home for a loss. If you can find a buyer, taking the loss may be better for you in the end. However, you will have to figure out a way to pay your mortgage lender the difference between what you owe and the selling price of your home.
Not every situation lends itself to one of these options. If you are faced with possible foreclosure, knowing when and how to do a short sale can help you avoid the difficulties of foreclosure and let you make a fresh start.
People experience financial hardship for a variety of reasons. Losing a job, becoming ill or injured, going through a divorce or overextending with too much debt are common reasons people get behind in their mortgage payments. Many homeowners today are feeling the pinch when adjustable rate mortgages reset to higher rates. If you are behind on your house payments, you may believe that foreclosure is your only way out. However, there is another alternative, called a short sale.
A short sale occurs when your home sells for less than what you owe on the mortgage. This enables you to get out of a home you can no longer afford without going through the process of foreclosure. While neither foreclosure nor a short sale will solve your financial problems, it can be helpful to understand the differences and decide when a short sale is a good option.
What Happens in Foreclosure
Foreclosure is a process undertaken by your lender when you stop making your scheduled mortgage payments. First your lender will serve you notice that that they intend to foreclose. If you have no legitimate reason to dispute the charges and can’t come up with the cash to satisfy the outstanding payments, an ad goes in the paper to notify the public of the foreclosure sale of your property. If you have not vacated the property by the date of the sale, law enforcement officers may forcibly remove you and your possessions from the home.
Following the foreclosure sale, your credit rating will suffer a tremendous drop. The cost of borrowing money will likely be extremely prohibitive. You may even have to consider filing for bankruptcy.
Adding insult to injury, if your home sells for less than what you owe, you may even owe federal income taxes on the difference. Your wages could be garnished for as long as it takes to satisfy this amount!
Going through a foreclosure is draining, financially and emotionally. It can take years to recover the stability you and your family once enjoyed. If you are not prepared to deal with the issues of foreclosure, you may want to consider doing a short sale. Understanding when to do a short sale can help you avoid the embarrassment and disruption of the foreclosure process.
When to Do a Short Sale
A short sale will help you avoid foreclosure, but you should understand how short sales work to decide if you wish to proceed with one. A short sale can be a complex and time-consuming process that is difficult to handle on your own. You will probably want to involve a financial adviser and lawyer to help you avoid some of the pitfalls of the process.
The key feature of a short sale is that your home will sell for less than what you owe on your mortgage. Let’s say your house sells for $50,000 less than your mortgage balance. You need to find out if your mortgage lender will expect you to pay this amount of money back to them.
You also need to find out if you will be required to pay income taxes, transfer taxes, real estate commission and closing costs on this amount. A short sale can be a good option if your lender agrees to forgive the difference, and if you will have the funds available to pay any associated taxes or fees.
When to Avoid a Short Sale or Foreclosure
When you’re on rocky financial ground and worried that you may lose your house, acting quickly can help you avoid a short sale or foreclosure. The key is to address the situation before your lender decides to foreclose.
If your financial troubles are short-lived, and you believe you can get back on your feet, you may consider contacting your lender and asking for a brief period of leniency. If a foreclosure or short sale seems imminent, refinancing may be another option. If the market has improved since you took out your mortgage, you may be able to keep your house and get some breathing room back into your budget.
Another option when a short sale or foreclosure is looming is to consider selling your home for a loss. If you can find a buyer, taking the loss may be better for you in the end. However, you will have to figure out a way to pay your mortgage lender the difference between what you owe and the selling price of your home.
Not every situation lends itself to one of these options. If you are faced with possible foreclosure, knowing when and how to do a short sale can help you avoid the difficulties of foreclosure and let you make a fresh start. |
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