subject: Definition Of A Short Sale And How It Can Help You Financially - Reduce Damage To Credit Scores [print this page] The real estate industry has undergone a transformation the past year. It has gone from a seller's market to a buyer's market and the short sale is becoming more common. Homeowners who took advantage of the low payments offered by an adjustable rate mortgage five years ago are coming to realize they cannot afford the new, higher interest mortgage payments. Traditionally, the next step for homeowners would be to refinance. For many though, the home's value has dropped so significantly that the equity they thought they had is gone. Realizing that other steps must be taken, they turn to a real estate agent.
Now they find that the home won't sell for enough to pay the balance of the mortgage, let alone the fees and commissions that accompany a sale. A short sale may be the homeowner's best option for selling their home and avoiding foreclosure or bankruptcy. This is that process by which a home is sold for less than the loan amount still owed to the bank. Banks are becoming overwhelmed with the amount of inventory from foreclosures, with few people to buy them. This helps them collect much of the money they would not have otherwise been able to.
To qualify for a short sale, the homeowner must prove financial hardship. Once the inability to make the required mortgage payment has been demonstrated, they must be willing to cooperate with the process. If the bank forgives the remaining balance, a 1099 is often sent. The difference between the sale price and the amount owed is considered taxable income by the IRS. Although this often causes a hefty IRS bill, for many it is preferable to the alternatives. When a homeowner goes through foreclosure, it stays on the credit report for seven to ten years. It also lowers a credit score by up to 100 points.
The short sale stays on the credit report for a much shorter period of time and affects the credit report by an average of 45 points. This is often the best solution for homeowners can no longer afford their monthly payments, especially if the circumstances do not look as though they will change in the near future. Due to the increase in the foreclosure market and the number of empty homes waiting for resale, many financial institutions are willing to be more flexible in helping homeowners find a solution. Using this method, re-establishing credit and securing a new loan is much faster than through foreclosure.
