You don’t buy a house imagining someday it will end up in foreclosure. A beautiful home is built with dreams, but foreclosure can turn your dream into a dreadful experience. There are ways to save your home from foreclosure. Read this article to learn more.
Sometimes, foreclosure seems to be the only option. You cannot pay back the mortgage, and there is no option of delaying the payments. The lender is forcing a foreclosure. What is a possible solution in this case?
In some cases, we find out that the homeowner is behind on mortgage payments and the house has lost its market value. You once purchased the house for $375,000, and now it is worth only $320,000. You must pay back the entire $375,000, but the price of your home will not bring you that much. A short sale describes a situation when you sell a home at a discounted price, and your lender accepts this proposal.
If the value of the home has declined, then seeking a short sale of the house is one way to avoid foreclosure. In case of a foreclosure, the lender can sue you to pay the remaining funds. After the short sale, the bank can impose a deficiency judgment, but in most cases, it does not happen. Your lender can also choose to forgive your debt which frees you from the obligation of paying the loan.
Why is a Short Sale Better than a Foreclosure?
It Can Save Your Credit History
Both foreclosure and the short sale will damage your credit history. However, a short sale is less expensive.
- A short sale drops your credit score by 150-200 points.
- A foreclosure reduces your score by 250-300 points.
You can minimize the effect of a short sale. If your lender reports that your debt has been paid in full, then a completed short sale won’t damage your credit history.
You Can Buy a Home Sooner
You will need to buy a new home sometime in the future. A short sale increases your chances of getting approved for a mortgage. If you had to sell the house because of tight financial conditions, then you can re-apply for mortgage approval after two years.
Work on your finances and in next 2-3 years; you can repurchase a house.
Compared to that, a foreclosure limits your ability to purchase a property. According to lending rules, the mortgage companies won’t accept your application unless seven years have passed since the foreclosure.
A Short Sale Offers Peace of Mind
Selling a home is stressful, but you cannot compare it to the burden of facing foreclosure. The complicated legal process, harassing calls from the lender, the guilt, and embarrassment of losing your house to the foreclosure and questions related to the future make it extremely difficult to deal with a foreclosure.
A short sale allows you to sell your home with peace. You do not have to lose your property in a foreclosure auction. Instead, you can sell the house to a homeowner. You can handle the matter with dignity.
A Short Sale is Better for the Lender
There is no reason a lender will accept a short sale if they can recoup their loss by foreclosing a house. Banks don’t advertise this fact, but they lose money when foreclosing a property.
Too many foreclosures can also limit the lending ability of a financial institution.
Banks get their money fast when they accept a short sale. Financial institutions deal with cash. Taking over a property that keeps sitting on the market only results in a financial loss which does not do anyone any good.
A short sale is preferred because it is the ray of light at the end of the tunnel. When life doesn’t go your way, you can take this option to experience financial relief. When a lender approves the sale at the proposed price, you are no longer responsible for paying for an unaffordable property. You can let go of the property without worrying about the pending balance. Even if the lender does not fully forgive your debt, a short sale lessens your financial burden and makes it easier to get back on the track of economic freedom.
IRS considers forgiven debt to be your income. For instance, your home sells for $200,000 while the remaining mortgage amount owed was $225,000 and your bank forgives the $25,000 difference. The $25,000 will be treated as income by the IRS, and you must pay income tax. There are exceptions, so the best thing will be to consult a tax attorney as there are ways to avoid getting a tax bill after you complete a short sale transaction.
If you need assistance with a short sale or have questions regarding the process, please contact us. Our representative will guide you through the process and will answer any questions you have.