Short sales can be an advantageous alternative to foreclosure

April 10, 2013

When the economy is good, many homeowners who are facing foreclosure can prevent the foreclosure by selling their property and paying off the lender. However, in the economic difficulties of recent years, many people find themselves owing more on their home than their property is worth. In such cases, even if they successfully sell the property before the foreclosure, the proceeds of the sale would not be enough to pay off the mortgage.

Homeowners facing such a difficult dilemma often have to choose between foreclosure and bankruptcy. However, many in this situation may not want to keep their home, cannot afford their home or desire to protect their credit. Fortunately, there is a third option for such a group: a short sale.

In a short sale, the homeowner and the lender agree to sell the property for less than the amount remaining on the mortgage. In this arrangement, the homeowner typically gets no equity. However, there are many advantages to a short sale versus a foreclosure.

Protection from deficiencies

Short sales are especially advantageous for those with second mortgages. During foreclosures in California, the holder of the first mortgage typically receives most or all of the proceeds once the property has been sold, leaving little or nothing to pay any second mortgages. As a result, holders of second mortgages can sue homeowners for the amount that was unpaid by the foreclosure sale.

It is different for short sales. Under California law, homeowners cannot be sued for the deficiency balance--the difference between the sale price of the property and the amount due on the mortgage--if the property is sold for less than the remaining amount on the mortgage, such as in a short sale.

Credit score effect

A foreclosure can affect your credit score for years after the foreclosure sale, making it harder to qualify for prime interest rates, other loans or even jobs. With a short sale, your credit score takes much less damage, in most cases.

Time to think

Like bankruptcy, short sales can delay foreclosure, assuming that your lender has agreed to extend the foreclosure sale during the approval process for the short sale. This can give you enough time to secure reasonable living arrangements in the meantime.

Supplement to bankruptcy

If you are overburdened by credit card, medical or tax debt, filing bankruptcy concurrently with a short sale may be a good idea. As the short sale works by getting you out of an underwater mortgage, bankruptcy can work to help free up your financial resources by relieving you of the obligation to repay many such types of debt, such as credit card or medical bills. Once the short sale and bankruptcy have been completed, you can move on with your life while in a stronger financial situation.

Consult an attorney

The federal government recently extended the Mortgage Forgiveness Debt Relief Act, which allows taxpayers who had all or part of the balance of their home mortgages forgiven (such as while taking part in a short sale) to exclude the forgiven debt from their incomes for tax purposes. In order to qualify, taxpayers must have their debt forgiven before January 1, 2014.

If you are facing foreclosure and are considering a short sale, contact an experienced attorney who can ensure that the process is carried out with your best interests protected.

Article provided by Sobti Law Group
Visit us at www.americanrescuesolutions.com