Mittwoch, 19. Februar 2014

Short Sale: What is a Short Sale and How Does It Work

Choosing to do a short sale instead of filing bankruptcy or going through with foreclosure is not an easy decision to make. However, a short sale is almost always the best thing to choose when thinking about how to get out of the house with the least amount of damage to you and your credit.

These is a hard time of life for many people, and many people want options to help them walk away from homes they can no longer afford. A foreclosure is very difficult and will subject you and your family to many bad moments. Some people think filing for a bankruptcy will help, but it usually only delays the inevitable foreclosure. A short sale is the best option for those experiencing money woes.

So "What is a Short sale?" A short sale occurs when you sell your house for less than the full amount you owe to your bank. Short sales are very common these days because many people need assistance in getting out of their bad loans. A short sale will help the homeowner avoid the public embarrassment of going through a bankruptcy or a foreclosure.

Additionally, the federal government has created a couple of programs to help homeowner's who choose to do a short sale. The first program is the HAFA program. HAFA stands for Homeowner's Alternative to Foreclosure Act. The main point about this program is that it forces lenders to accept the short sale payment as payment in full on the loan and it also forces lenders to give the homeowner's $3,000 back at the close of escrow to help with relocation costs. Prior to HAFA, a lender was not required to accept the short sale payment as payment in full on the loan, and this meant that many lenders, such as Chase and Bank of America, would go after the homeowner after the sale of the house had closed and try to get a deficiency judgment forcing the homeowner to pay the remaining amount owed, or file bankruptcy.The federal government saw this was causing homeowner's to choose foreclosure over short sale, and this is why they created the HAFA program.

The 2nd program the government put into act is the Mortgage Forgiveness Debt Relief Act of 2007. When a short sale closes and the lender accepts the short sale payment as payment in full, the lender will then send the homeowner a 1099-C. Previously, this 1099-C would have been considered income to the homeowner and would have significantly raised his tax liability. However, under this Act, the qualifying homeowner can claim the income as $0 and not increase his/her tax liability. In essence, the federal government has given incentives to all parties to consider a short sale instead of a foreclosure.

It is important to remember that not all lenders will accept a short sale or a discounted payoff. Unfortunately, there are a few circumstances where the lender will make more money selling the house in foreclosure, than if they were to accept a short sale. That being said, it is usual for a lender to accept a short sale because they want to avoid a costly foreclosure also.

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