Short sales have overtaken foreclosures as the preferred method for disposing of distressed mortgaged properties. As the popularity of short sales climbs, so does the amount of short sale misinformation and urban myth. Let’s debunk a few legends.
- Short Sales Take Forever: This used to be true! Banks would diddle around for a year or more before allowing a short sale to proceed. The federal regulators finally had enough of the banks slow-walking the process and issued new rules that affect most lenders. The decision on whether or not to accept an offer now should be made within 30 days and definitely in no more than 60. Lenders are obligated to keep homeowners informed about the decision status with periodic updates.
- Homeowners Walk Away Empty-Handed: This also used to be true! The bank forgives part of the homeowner’s mortgage, which technically is income, but the homeowner never sees any cash from the buyer – it all goes to the lender, as it should. What’s changed is that banks now routinely award relocation reimbursements to homeowners who agree to short sales. This amount can be as great as $35,000 (Bank of America). These incentives are one reason homeowners are more amenable to short sales.
- Short Sales will Wreck the Homeowner’s Credit Rating: This is not quite true. What wrecks your credit score is withholding mortgage payments. If you keep current on your mortgage balance, a short sale will leave your credit rating intact. You may even be able to secure a new mortgage (on another property) within months. Foreclosures can destroy your credit rating for five years; bankruptcies can poison your score for up to seven years.
- Short Sales Can Create Tax Obligations for Homeowners: This is not true for the rest of 2012. A special law waives the tax on the forgiven loan amount, which normally would be treated as taxable income. The exemption expires at the end of 2012 – technically, short sales agreed to by December 31 have another eight months to close under the exemption.
- Short Sale Agents are Interchangeable: Really false. Some are great, some stink. For instance, for every good San Diego short sale company, there is another that you should avoid. Do your homework before picking an agent to represent you in a short sale transaction. There are special documents and procedures used for short sales. A regular real estate agent without short sale experience can end up making costly mistakes. It’s always better to use a specialist with a long background in short sales.