How does a seller benefit from a short sale?
Closure. People facing foreclosure are inundated with collection calls, threatening letters, and visits from the county sheriff’s deputies. They no longer want to answer the phone or doorbell, and they dread walking to the mailbox to check the mail. Selling a property before a final foreclosure action brings the unpleasant calls, letters, and visits to an end. The seller can move on with their life.
Dignity. Imagine the shame of having sheriff’s deputies forcibly move you out of what was once your home. Imagine the awkward looks of the neighbors as you hurriedly throw a handful of possessions into a waiting car or truck. Imagine seeing the lender’s locksmith changing the locks as you leave the property for the final time. A short sale allows the seller to have a normal closing and a move on their own schedule. In most cases, the neighbors won’t know that a seller sold their property via a short sale.
Credit. A short sale, while damaging to a person’s credit, is less damaging than allowing the property to go to foreclosure. Settling the debt and ending the delinquent payments allows a person to stop the damage and start rebuilding their credit sooner. A short sale may affect a borrower’s credit for two years because lenders might report that a loan was settled for less than its balance. However, a short sale is not a permanent stain on one’s credit. A foreclosure, by contrast, is permanent in the records of the county and the borrower will have to disclose their foreclosure on loan applications for perhaps the rest of their life. People who work in sensitive positions, such as those with security clearances, may jeopardize their future employment by allowing their house to be foreclosed. A seller may be able to convince the lender to include a letter of explanation in the credit file that outlines the extenuating circumstances that caused the short sale. This can soften the blow to one’s credit.
Avoid Bankruptcy. A mortgage loan is typically the largest debt instrument a person must service. By selling the property via a short sale, a person might avoid bankruptcy altogether. A bankruptcy would affect all of the seller’s creditors and be more damaging to the seller’s credit rating.
The best time we’ve seen to conduct a short sale is right now. The federal government has a program available for certain homeowners who qualify. The banks have new systems and staff in place to process short sales. Some banks now have a cooperative short sale system, where the bank makes it much easier for someone to sell their house. The tax laws allow for a person to not pay any income tax on their forgiven debt from a short sale of their principal residence as long as the sale occurs in 2012.