Video:How to Choose a Short Sale Over Foreclosure

Transcript:How to Choose a Short Sale Over Foreclosure

Hi I'm Pankaj Malik for About.com and today we are going to be discussing why it is preferable to do a short sale rather than let your house go into foreclosure.

What Is A Short Sale?

Let's say you owe the bank $500,000 on your mortgage. However, the house is only worth $300,000 and the maximum price you can get for your house on the open market is $300,000, so you will make an offer to the bank to pay them less than $300,000 on the mortgage, and they will essentially wash out the balance of the $200,000 you owe them on the mortgage. That is called short selling to the bank or short payoff.

What Is A Foreclosure?

If you are more than 120 days late on your mortgage payments, you are automatically considered in foreclosure. And, technically, after 120 days, the lender will hire foreclosure attorneys who will serve you with court papers, take you into court and foreclose on your house and take back ownership of the house. The procedure varies on the jurisdiction that you live in.

Impact on Credit Report of a Short Sale Or Foreclosure

When you have a short sale on your credit report, it will show up as a "settled account." "Settled" means you paid back less than what was owed to the bank. The damage may not be as devastating to your credit might as an actual foreclosure sale and you still may be able to rehabilitate your credit.

Short Sale and Foreclosure Taxes

When you do a short payoff, it is called debt forgiveness. So, the bank has agreed to forgive your debt for a certain amount and they are going to reduce what they accept as payment for that loan. First, they will not sue you for a deficiency judgment because they have released you from any further obligation on that loan.

Second, if you do proceed with a short sale, even if it is your primary residence, you run the risk of getting a 1099. Even if you do get it, if you have a good accountant, you could explain to them that you did not make a profit. This is not money that went into your bank account. This is money that you lost. He (the accountant) should know how to reflect it accurately on your tax return.

If you get foreclosed upon, you have to remember -- if you are not paying your mortgage, you cannot deduct that mortgage interest. So, you should make sure that you tell your accountant what months you actually paid your mortgage. You should not just tell him what the interest amount is for the year. If you write the property off as a loss, you have to discuss with your accountant how it should be reported on your return.

Additional Tips on Choosing a Short Sale Over Foreclosure

I would advise you to be wary of entities called third party negotiators. These are not lawyers. These are not real estate brokers. These are not mortgage brokers. These are just companies that have set themselves up to negotiate on your behalf with a lender and they try to make some money out of the deal. These people are not licensed. They are not authorized. Please stick to a licensed attorney or real estate broker to negotiate the short sale on your behalf.

Short sales can take a long time. If you have a buyer, make sure that the buyer is committed. Make sure your contract reflects, if you do find a buyer, the contract reflects that it is a short sale transaction and make sure that the buyer cannot cancel the contract without giving you ample time to get a short sale approval. In some cases, it can be up to six months.

Thanks for watching. For more information, visit us on the web at About.com.