Short Sales, Foreclosures and Bankruptcy

Short sales on a mortgage are defined as an agreement between the home owners and

the bank to accept an offer for the home which is less than is owed on the home. A foreclosed home is not a home which can have a short sale. A foreclosed home is already owned by the bank and a sale for a price less than the amount of the mortgage is just that, a reduced price sale.

To request a short sale, you do not have to be behind on your mortgage. Many people request a short sale when they get behind on their mortgage and it's about to be foreclosed on. However, a short sale can happen at any time. To be a short sale, the homeowner must not be able to sell the home for the amount owed or more, but at least the amount owed. This is considered upside down. Because the owner is not able to sell the home for the amount of the mortgage due, the owner or seller can request a short sale. In a short sale, the amount left due is considered a deficiency. In many cases the deficiency can be negotiated with the bank to have the bank write off the amount or at least reduce it. When it's reduced or written off, the amount written off is considered income and reported on a 1099, the amount expected to be paid is financed in a promissory note.

A seller facing bankruptcy or preparing to file bankruptcy that is attempting a short sale on their home must provide a letter from an attorney stating that they qualify for bankruptcy to the bank and generally the bank will write off the deficiency in a short sale. While the seller takes some negative credit score impact, it is usually very minor with a statement saying the creditor settled for less than amount due.

Foreclosures seriously affect your credit score and report. Because a foreclosure is generally reported as a repossession of your home or property, it impacts your credit in a far more negative way than a short sale. Bankruptcy also impacts your credit score negatively. In the order of severity to your credit report, foreclosure is the worst, followed by short sale and bankruptcy. Because a short sale can result in a bank placing a comment of "foreclosed" instead of the more gentle "settled for less" comment, it can impact far more heavily than bankruptcy.

However, again, to attempt a short sale does not require you to be behind on your mortgage payments. A short sale can be simply what it a sale of a home is for less than is owed on it. Generally if there's no financial distress, the bank will not write off the difference but will create a promissory note for the deficiency which the seller must pay to the bank.

In today's economic times, short sales are far more common with the rising foreclosure rates and bankruptcies. When considering short sale or bankruptcy, consider all of your other options first.

Short Sales, Foreclosures and Bankruptcy

By: Millie Borris

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