A Short Sale To Avoid Foreclosure May Have Pitfalls
When referring to avoid foreclosure, a short sale occurs when a mortgage lender accepts less than the amount owed. This usually takes place when a homeowner can’t keep up with his monthly payments, an arrearage is accruing and foreclosure is imminent. If the homeowner simply ‘walks away’ from the home, the foreclosure takes place and his credit is seriously damaged. However, in some instances, the homeowner contacts his lender and negotiates a short sale where the bank or finance company agrees to accept less than the full balance owed on the mortgage. The theory here is that in this way, the homeowner loses the home but protects his future credit by avoiding the stigma of foreclosure on his credit report. At least that’s the theory. In practice, it may turn out quite differently.
When a lender accepts a short sale, he many not forgive the difference between what was owed on the mortgage and the short sale price. Moreover, you may end up owing the IRS money due to the fact that they consider that price differential your income and it is therefore taxable.
Before deciding to investigate a short sale with your lender, explore every other possible option with him. If the sort sale is the only possible way to prevent foreclosure, be absolutely certain you understand all the possible repercussions and get them in writing. Inquire from the lender whether the remaining balance due on the debt will be forgiven or if they are going to file a judgment against you in that amount. Also ask for the new loan balance and how the short sale will be listed on your credit report. Is it going to appear there as a charge off (which is bad) or as a balance paid and the mortgage account closed? These are facts you need to have before you sign on the dotted line. The short sale may have credit pitfalls that are almost as negative as the foreclosure itself.
Of all the options that come to mind when foreclosure trouble is knocking on the door there is one you must avoid at all costs. That is making any kind of a deal with the onslaught of ‘foreclosure rescuers’ that will fill your mailbox and may even tack up hand-written notes on your front door. Almost all of these are scams that won’t help you solve the foreclosure dilemma but will relieve you of some money you can ill afford to part with at this point in your life. And the few that aren’t scammers really can’t do anything more than you can do when you discuss the problem with your lender. Avoid!! You see, when a mortgage goes into default, it appears in Realtor’s publications and on the Internet on websites like RealtyTrac.Com These are public records available to anyone who wants use them including investors looking for a bargain and the ‘rescue’ scammers.
Therefore, the best thing you can do is consult an attorney, CPA or financial counselor before taking any extreme steps to avoid the foreclosure mess. The US Government’s HUD (Housing and Urban Development) website can lead you to FREE counseling from HUD professionals that can give you solid, legitimate advice.
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Fortunately, Congress is considering repealing the “phantom tax” on short sale income. Unless the law is made retroactive, it may come to late for the thousands of people currently in foreclosure.