Sale Consequences for Seller
Short sales, in which a home owner lists a home for sale for a sum less than the outstanding mortgage on the home, are increasingly common in a difficult housing market. According to the National Association of Realtors, short sales represented 12 percent of all real-estate transactions in 2009. If finished, a short sale provides a loss for the bank or other institution that extended the loan to the homeowner. Therefore, the homeowner must negotiate the conditions of the sale with the bank before trying to sell the property. There are a variety of impacts for the owner of a short-sale property.
A mortgage payment that’s too high to get a homeowner is the most frequent reason for listing a home in a short sale. If finished, a short sale allows the property owner to save on the cost of the mortgage. It also conserves the creditor the cost of foreclosing on a home where payments have stopped and the loan is in default. However, a short sales results in a reduction on the loan, and also the conclusion of interest payments and servicing charges which represented the creditor’s profit.
The difference between selling price and outstanding loan amount, called the deficiency, could be claimed by the creditor even after the short sale is finished. The home-seller might find that the lender has lasted with collection proceedings, or has filed a suit in civil court for recovery of the unpaid loan balance.
The lending company will report that the short sale to credit-reporting bureaus, who’ll show the trade as an unpaid and uncollected debt. This will influence the short-seller’s credit rating unless the deficiency is reimbursed or otherwise settled. Although short-sales do not have the exact same effect as bankruptcy or foreclosure, they still represent negative credit performance that prospective lenders will take into consideration in the event the short-seller attempts to secure another mortgage.
For the sale to proceed, poor lienholders, such as banks which have extended second mortgages or lines of charge on the property, has to agree to cancel their claim. They might be left with a net loss of all outstanding debts unpaid by the vendor. Following the primary mortgage lender is compensated, these lenders must settle for any amount they could negotiate with the primary lender. In some cases, second lienholders have required additional payment”off the books” in return for an agreement to lose their liens.
At one time, the Internal Revenue Service, as well as the country of California, treated all debt canceled because of a short sale as taxable income. But by the national Mortgage Lending Relief Act of 2007, married taxpayers could exclude up to $2 million of forgiven debt during the short sale of a principal residence. The legislation took place in 2007 and is legal through 2012. The release of debt has to be directly related to the seller’s financial status, or the falling market value of the home. California has also passed the Conformity Act, that in 2010 began allowing state taxpayers that are unmarried or married filing joint returns to exclude $800,000 of debt forgiveness on a principal residence. Those filing as married but with separate returns may exclude $400,000.