(This is more of an addendum than a continuation to the previous post, How Does a Short Sale Work)
A short sale is an arrangement between a homeowner and the bank which holds the home’s mortgage to sell the property for a price less than the value of the mortgage. Short sales have experienced a sharp rise over the past few years as more homeowners find themselves either unable to make their mortgage payments because of a sharp rise in interest rates or unwilling to continue paying their mortgage because the value of the home is less than the cost of the mortgage. The latter scenario is commonly called being “upside-down.” Entities involved in a short sale including the bank, the homeowner, a real estate agent representing the homeowner and various legal representatives including attorneys for the homeowner and the bank.
There are several things to know about short sales before entering into an agreement with your bank. You may want to consult your real estate agent and an attorney to advise you during this process. First, the difference between the remaining balance on the mortgage and the price it is ultimately sold for is called a “deficiency”. Even though a short sale will eliminate your mortgage obligation, you will often be required to enter into an agreement with a bank to pay back this deficiency over time. Even if the bank does not require you to pay this deficiency, they will usually report this fact to the credit bureaus which can both negatively affect your credit rating and create possible tax implications.
There are two other important points to clarify about short sales. One, a homeowner should always have written documentation detailing what their responsibility is for the deficiency. If it is not in writing, the obligation is on the debtor (homeowner) to prove that any debt arising from it is not your obligation. Second, a short sale only exists between a home owner and the bank which owns the mortgage. Simply selling your house for less than it is worth does not necessarily constitute a short sale. There are many potential complexities and tax issues surrounding short sales. It is advisable to consult an attorney or realtor if you are considering one.
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