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How Does a Short Sale Work?


A short sale happens when a lender agrees to take less than is owed on the mortgage agreement from a buyer’s offer. Bank’s are under no obligation to accept or allow homeowners to sell their house on a short sale. In fact most banks will only accept a short sale agreement if it makes more sense financially to short sale rather than foreclose. For the lender to even consider a short sale you must qualify with proof of hardships.

Short Sale Qualifications

Market Value vs. Loan Repayment: One factor a lender will use to allow a short sale is whether the home’s market value has dropped. You must bring in the paperwork to show the lender the housing market has fallen dramatically in the area you live in, thus affecting the value of your home.

Loan Default in Imminent: You have allowed your mortgage to become or is near to becoming in default. Proof of hardship is required for banks to consider a short sale. Unemployment, divorce, medical problems, bankruptcy, or death is all good reasons a bank may take into consideration your application for a short sale.

No Assets: Having no assets is also taken into consideration when applying for a short sale.

You Must Sleep in the Bed that You Made

Reasons that do not constitute hardship on your part are if you made a bad purchasing decision, got pregnant, moved to an apartment, or decided to buy another home. The lender is not responsible for you making decisions that affect your ability to pay for your house.

Consequences of Short Sales

You must remember that short sales will have an effect on your credit ratings even though you do sell the house. To qualify for a short sales you must be in default on your loan, this will show up on the credit report. The lender can issue a 1099 after the sale for the difference between the sale and the mortgage amount, you end up owing money to the IRS. The sale is dependent on a buyer making an offer the bank will accept. Selling to a relative can result in mortgage fraud because you cannot benefit from the sale of your home.

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