short sale

Short sales are an excellent way out of the foreclosure advantageous to both the lenders and borrowers if certain guidelines are followed. By a short sale is meant the sale of the house by the owner with the consent of the lender wherein the latter agrees to accept an amount that is less than the loan amount.

The borrower gains by not having the ignominy of a foreclosure tagged on to the credit history. The lender benefits monetarily because a foreclosure entails bigger expenses and hence greater loss than a short sale agreement.

There are indications that the economy is inching upwards but house prices are still low – suffering from the hangover. Many are postponing sales hoping for prices to recover. But some are compelled to incur losses and sell off in short sale deal. It is not something that is desirable but it becomes necessary when there are no other options.

An August report indicated that 80% of the houses in the housing market have increased in value. Another July report said the values were down by 21% from the peak it had touched in second quarter of 2006. July was the 6th running month that the decline pace had somewhat slowed down.

Fall in house values indicated that the borrowers had gone underwater – the house value being less than the loan amount due. This is especially so in the cases of those who have made negligible down payments and opted for exotic mortgages or ate up all their equity by repeated refinancing. This had been the dominant practice in the last decade.

Those opting for short sale should consider some general guidelines. Firstly the borrower has to qualify for the short sale. It happens when a near default stage has been reached, and the value of the house has drastically decreased. The top priority is to talk things over with the lender as the latter has to give the permission for the short sale. A letter expressing financial hardship should be forwarded to the lender by proper mail so that it is receipted.

The process is laced with stringent conditions by the lender. The agents would have to agree to nominal commission waiving aside the usual rate. Thus experienced agents should be sought out.

The tax consequences have to be understood as sometimes the balance amount is not forgiven by the lender but kept pending. Even if it is the tax authorities might consider it to be a gain and impose taxes accordingly.

A short sale can damage credit history. Thus it is best to seek alternatives like loan modification or refinancing.