What is a short sale and how long you have to wait to buy another house again?
I heard a short sale in when you can pay or can sell your house for the amount you bought it for… For example I bought my house for 5k and now it cost between 0k to 0k, so it is upside downs for around k. I heard that I can hire a realtor he will sell it for a less amount and the rest the bank will "eat it". But I have to wait certain years to buy another house again. How many years do I have to wait to buy again?
As others have mentioned, a short sale occurs when the lender agrees to let you pay less than the actual loan amount when you sell your home. You have the general idea right but it is somewhat more complicated and there are some negative consequences that you should be aware of.
First, if you are not having problems making the payments each month then your lender will probably not allow you to do a short sale. Why would they if they believe that you can keep making the payments on the full loan amount? So, most banks won’t even consider a short sale until you have missed a few payments. These missed payments will show up on your credit report as "lates" and will have a negative effect on your credit score.
Second, the bank may or may not accept the loss which, in your case is around $60,000. While most lenders will not pursue a deficiency judgment they do have the ability to do so in some states. Usually if the mortgage was used to actually purchase the home they will not pursue a deficiency and cannot in CA but if it is a refinance then they can pursue a deficiency judgment by suing you in court. It’s not likely that this will be the case but you should be aware that there is the possibility. When conducting the short sale negotiate with the lender to make sure they are not going to pursue a deficiency.
Third, it is also possible that the IRS will want you to pay taxes on the $60,000 "debt relief". The IRS sees it as income because it is money that was given to you and you had it at your disposal. There are ways to avoid this tax. There is an "Insolvency Exclusion" that occurs when your liabilities/debts are larger than your assets. If this is the case at the time of sale then it’s possible the IRS will exclude the shortfall ($60,000) from taxation. You definitely need to talk to an experienced accountant or tax attorney about this before the sale occurs as it could save you quite a bit of money and needs to be done correctly.
Lastly, your credit report will be affected negatively by a short sale. While each case is different and no specific numbers are known, the general consensus is that a short sale will cost you 100 points on your credit score and stay on your credit report for anywhere from 18 months to 4 years. However, it is still better than an outright foreclosure which can cost up to 280 points on your credit score and stay on your credit report for up to 10 years.
So, with a short sale it may be possible to purchase another home in a couple of years – depending upon the circumstances. You would have to work on improving your credit over that period of time and you would also be subject to poor loan terms when you do get a loan ie. a higher interest rate and larger down payment.
In the end a short sale is a better alternative than a foreclosure. If you don’t have to sell your home perhaps you should contact your lender to see if they will consider a forbearance or modification of your existing loan terms. If so, then you might be able to lower your payment or skip a few payments until your financially back on your feet.
Good Luck!
Comment by JT — July 18, 2009 @ 5:14 pm