| The recent housing bust has impacted every corner of | | | | (Equifax, Experian and TransUnion). The notion in your |
| the housing market throughout America. Approximately | | | | credit will show that the mortgage was terminated in a |
| 15% of all homes are currently underwater which | | | | short sale. It is not unusual to see your credit score |
| means the value of the house is lower than the | | | | drop anywhere from 100 to 150 points as soon as this |
| outstanding balance on the mortgage. Homeowners | | | | notation shows up in your credit report. This notation |
| are unable to sell because they would be required to | | | | will remain on your credit report for seven years. |
| bring cash to the closing table for the difference | | | | Future lenders will be wary of any application for credit |
| between the selling price and the mortgage balance. | | | | with this notation on your credit report. The only saving |
| An option for homeowners stuck in this situation is a | | | | grace is that your score will eventually recover and it |
| short sale. A short sale occurs when a bank allows a | | | | will recover faster under a short sale than if you let the |
| homeowner to sell the property for less than what is | | | | property go into foreclosure. |
| owed on the mortgage. Banks are willing to consider a | | | | You may be limited on your ability to purchase another |
| short sale because it is possible that they will loose | | | | house |
| less money than if they foreclosed on the property | | | | Fannie Mae recently changed their lending |
| and then tried to sell it as an REO (real estate owned) | | | | requirements. If you sell a property via a short sale, |
| property. You must get your bank to agree to the sale | | | | you will not qualify for a Fannie Mae financed loan for |
| since they will be forgiving part of the debt that you | | | | two years from the date your home was sold. If you |
| owe them. | | | | will be using Fannie Mae backed financing, there is no |
| Before a seller considers doing a short sale, he must | | | | exception to this rule. If you want to purchase another |
| be aware of these four items and what impact they | | | | home within two years, you may have to seek |
| will have. They may determine whether or not you | | | | alternative financing or mortgages that are not backed |
| want to consider pursuing it. | | | | by Fannie Mae. |
| Seller must prove to the bank that they have a bona | | | | |
| fide hardship | | | | You may owe taxes on the amount the bank forgives |
| Banks are in the business of making a profit and for | | | | Banks use to send a 1099-C to any homeowner for |
| that reason they are not willing to forgive part of the | | | | the amount of the deficiency which is the difference |
| balance of the mortgage for sellers who are | | | | between the selling price and the balance of your |
| underwater. If the bank knows that you can make the | | | | mortgage. The IRS would treat this as income meaning |
| monthly mortgage payment then they will expect you | | | | you owed taxes on this income. In 2007 Congress |
| to make the payment. On the other hand if there is a | | | | passed the "Mortgage Debt Relief Act of 2007." This |
| financial hardship banks will be willing to work with you | | | | Act allows taxpayers to exclude income from the |
| so they can limit their loss. Banks will ask you to | | | | discharge of debt on their principal residence. If you did |
| document your financial hardship by providing bank | | | | a short sale on a second home or an investment |
| statements, pay stubs and tax returns. If you do not | | | | property, you will be stuck with a nasty tax bill as a |
| have a financial hardship, you will not be able to get the | | | | result of doing the short sale. |
| bank to agree to a short sale. | | | | With the recent housing bust, homeowners may be |
| | | | tempted to do a short sale to get rid of their |
| Your credit score will tank | | | | underwater property. Before pursing a short sale |
| When a bank performs a short sale, this action is | | | | make sure you understand the potential impact of this |
| recorded with all three of the major credit bureaus | | | | decision. |