Figures produced by RealtyTrac showed that there were a colossal 861,664 foreclosures in the United States during 2008. A succession of missed mortgage payments can leave mortgage lenders with little alternative other than going through the courts. However, it is possible to reach a short selling arrangement with the mortgage lender; this can write-off debt as well as protecting an individual's credit score.
Advantages of Short Selling
- No further debts. With the agreement of the lender, short selling allows a homeowner to sell a house for less than the value of the loan.
- Better sale price. A short sale is better than foreclosure because it ensures that an open market price is achieved. Many properties are sold at auction for well below their true value. Mark Boyland, an associate broker at Keller Williams NY Realty, said that short selling is “a way to help out both the homeowner and the bank, and make a bad situation better."
- No affect on credit score. If a mortgage lender reports a short sale as "paid satisfactorily," it won't affect a credit score. Foreclosure will stay on a borrower's credit report for at least 7 years.
- Credit counseling. There are government funded organisations available, such as nfcc.org, that can help with the agreement of a short sale with a mortgage lender.
Disadvantages of Short Selling
- Lower credit score. A short sale that shows as "settled for less than the full amount due" will have the same negative affect on credit score as a foreclosure.
- Finding a buyer. Finding someone to purchase a house can be very difficult in a falling market.
- Awkward mortgage lenders. Whilst many mortgage lenders prefer short selling, others are unhelpful to the plight of homeowners that have missed mortgage payments. This could mean that a homeowner will need to conduct negotiations through a specialist third party.
- Treated as a taxable income. The IRS considers unpaid debt or 'cancellation of indebtedness income' as taxable. However, there is a temporary exemption between 2007 and 2012 for mortgages under $1 million for single people and $2 million for married couples.
There are government-funded organisations, such as nfcc.org, that can provide homeowners with support. This includes negotiating a short selling agreement that minimises the affect on someone's credit score. A short sale is a better option than foreclosure as it makes the best of a difficult situation.
Readers that found this article useful may also be interested in taking out critical illness insurance or life insurance to protect their families.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
Sources
Realty Track
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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