What is a short sale and how long you have to wait to buy another house again?

Question by eripapito: 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 $ 235k and now it cost between $ 170k to $ 190k, so it is upside downs for around $ 60k. 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?

Best answer:

Answer by Star
A short sale is where a bank/lender (whomever holds the mortgage to your property) is willing to accept less than the amount of your mortgage so that you avoid foreclosure of the property AND the bank will not come after you for the deficiency. However, the difference between the amount owed on the mortgage and the amount of the sale is considered taxable income to YOU (or whoever was on the mortgage).

For example, your mortgage is $ 235,000 (although, I would think that it should be lower if you’ve made mortgage payments). You can only sell the house for $ 170,000 so there is a $ 65,000 deficiency. In a short sale, the lender is willing to accept the $ 170,000 and not go after you for the deficiency.

However, you will owe taxes on the $ 65,000 (you’ll get an IRS 1099 form).

As far as when you can buy again, that depends. I don’t think that any lender would be willing to loan you money since you’ve basically defaulted on the other loan for $ 235,000. Plus, in order to qualify for a short sale, you have to show that you are financially unable to continue making mortgage payments (and you probably have to be in default / delinquent for several mortgage payments).

Obviously, if you’re financially able to take out another mortgage, it is unlikely that the lender will even allow a short sale.

Know better? Leave your own answer in the comments!

Tags: , , , , , ,

Category : Blog

4 Comments → “What is a short sale and how long you have to wait to buy another house again?”

  1. RealtorV

    Nov 25, 2013

    The banks are getting stricter on not allowing short sales. My clients have had 2 of them shot down in the last month, so dont be surprised if the bank wont allow it. And it all depends on the lender. Now lenders are getting smart and putting liens on your personal self so when a creditor pulls a search it shows up that you shorted the bank 60,000. That stays with you til its paid off. Not all banks are doing this, but I’m seeing more and more. What about bancrputcy?

  2. CWW

    Nov 25, 2013

    A short sale in simple terms is when your lender agrees to take less for the property than what you owe. However, the lender must determine that you are experiencing financial hardship in order to consider it. In addition there are tax and credit consequences to this decision. Always consult with a professional tax advisor prior to making a final decision.

    There are other alternatives available to you. Please contact your lender and speak with someone in the loss mitigation dept. Perhaps refinancing would be a better choice? Wouldn’t it be better to refinance and wait out the current market cycle than damaging your credit?

    Do your research, get an education, and make an informed business decision with professional guidance.

  3. Landlord

    Nov 25, 2013

    You need a better agent. Your did not explain it well enough. The bank is NOT going to simply “eat it”. This will destroy your credit, you will only recover as your credit recovers.

    The bank does write off the loss, BUT the loss is turned over to YOU in the form of income. They issue a 1099 with the IRS for the amount of their loss, and you have to claim it as income on your state and federal taxes. It is income because they actually did give you the cash, you bought a house with it. You are going to need to come up with about 40% (depends on your taxs tax rates) of that money to pay income tax on it. If you don’t pay the taxes on it your credit gets worse, and you have your state and the IRS doing what they do, and they WILL get their money if they have to garish half your wages. Also, the fines for not paying are very high.

    As it takes awhile to start garnishing you may loose your next house in the process, as most people do not budget to suddenly be short half of their income.

    Make sure you understand the process and will be able to cope with the process before you go this route.

  4. JT

    Nov 25, 2013

    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!

Send to Friend

Email Agent

SEO Powered By SEOPressor