Mastering The Short Sale: Financial Freedom Through Negotiation and Strategy
A short sale is a proficient financial strategy available to homeowners struggling with mortgage repayments, allowing them to settle their mortgage debt for less than the remaining balance. However, it’s essential to keep in mind that any forgiven mortgage principal is considered taxable income by the IRS. As of now, legislative amendments are being discussed to make it easier for homeowners to manage these debts, especially in the realm of subprime mortgages.
Key Distinction: It’s crucial to distinguish that a real estate short sale is entirely different from a stock short sale involving the borrowing and selling of stocks anticipating a price decline.
Real-Life Success Story: The Browns
Consider this scenario involving the Browns who had fallen significantly behind on their mortgage payments and were facing potential foreclosure from Hometown Bank. An investor named Stevens suggested a strategic move: the Browns should approach the bank and propose a short sale, offering to settle the $160,000 mortgage debt with a $140,000 cash payment. This proposal was enticing for Hometown Bank as it eliminated the costly process of repossession and property sale.
Here’s a simple breakdown of how this transaction unfolded:
- Negotiation: The Browns negotiated with Hometown Bank to accept a lump-sum payment of $140,000 in place of the full $160,000 debt.
- Settlement: Hometown Bank agreed to this idea seeing its potential benefits.
- Transaction: Stevens stepped in to purchase the property from the Browns for $150,000.
- Outcome: The Browns prevented foreclosure, the bank avoided further costs, and Stevens acquired a property at a profitable price.
Key Benefits of Short Sales
- Avoid Foreclosure: Homeowners can evade the detrimental consequences of foreclosure, including significant credit score damage.
- Debt Reduction: Allows for the reduction of outstanding mortgage debt through effective negotiation with lenders.
- Financial Relief: Families undergoing financial hardships find short sales to be a viable route to recover economically.
- Market Alignment: Enables the sale of homes with depreciated values in a slow real estate market.
Frequently Asked Questions
What is a short sale?
A short sale enables a homeowner to sell their property for less than the remaining balance on their mortgage, provided the lender agrees. The forgiven amount may be considered taxable income by the IRS.
How does a short sale affect my credit score?
While a short sale is less severe than a foreclosure, it will still negatively impact your credit score. The extent depends on your previous credit history and the specifics of the short sale deal.
Are short sales applicable to all types of mortgages?
Most types of mortgages are eligible for short sale, but the details and acceptance can vary based on individual lenders’ policies.
Can I benefit financially from a short sale as an investor?
Investors often find short sale properties valuable as they may be purchased below market value, creating opportunities for profitable resales or long-term investments.
What should I do first - consult a realtor or my bank?
It’s often beneficial to consult both. A realtor can provide market insight and assist with valuation, while a bank will discuss possible negotiations and their requirements for commencing a short sale.
Related Terms: foreclosure, mortgage forgiveness, debt restructuring, home equity, real estate investment.
