Many real estate markets are experiencing declining prices. In these times, it is common for the amount owed on a loan to exceed the value of the property itself. If the homeowners are unable to make their monthly mortgage payment, the potential for a default on the loan or foreclosure of the property increases.
Short sales are becoming an increasingly popular trend as the foreclosure rates continue to rise across the nation. “Short sales” is a term used to describe a situation in which the lender agrees to sell the property below the original appraisal rate to avoid foreclosure, in the case that the homeowner is at risk for defaulting on the loan. Many lenders do not easily agree to a short sale; however circumstances as the loss of a job or the death of a wage-earning spouse may make some more open to the idea.
Once a property is sold as a short sale, a portion of the original loan’s value is earned, the homeowner avoids the stress of foreclosure, and the new owner gets a property at a good price. In the case a short sale doesn’t work, the property does go into foreclosure.
Depending on how the lender reports the outcome of the short sale, the homeowner’s credit may be impacted. Some lenders report a partial loan repayment, which does not negatively impact the credit of the borrowers. Other lenders, however, can report the sale as “settled,” which may cause a significant negative impact on the borrower’s credit. Also, the portion of the loan forgiven can be counted as taxable income by the IRS.
While there are positive aspects about conducting short sale deals, there are also potentially negative consequences. The short sale of a home does not only impact the borrower’s credit, but can reduce the value of similar homes in the area, and may result in more taxes for the borrower. Homeowners having difficultly with making the monthly mortgage payment should talk to a real estate agent experienced in short sales.