To Short Sell or Not to Short Sell Your Home

In the current times the real estate market is seeing a drastic rise in the number of short sale listings. What is a short sell you ask? A short sale is when market conditions are so that the value of your home is worth less than what you currently owe on your mortgage and you decide to sell anyway. That's when you know you're in a short sell situation. How and why would someone sell their home if they will end up minus cash?

The why is easy to explain. The majority of reasons center around a home owner not being able to afford their monthly mortgage payment. Due to whatever circumstances such as job loss, divorce, or an unforeseen financial emergency more and more homeowners are considering short selling their home. Another factor that has plays a major role is homeowners with adjustable rate mortgages (ARMs) not being able to afford their monthly payment when it adjusts to a higher interest rate. It makes matters much worse when the current market conditions are bad and home prices are falling. Most homeowners facing these situations could have opted to refinance or borrow money against their home based upon their home value rising. A short sale is also a better alternative to foreclosure in which your home is taken back by the bank or lender, you get left with nothing to show for it, and your credit score is left virtually trashed.

The how part gets a little tricky. Yes, it is possible for a home owner to sell their home for less than the amount that they owe to the bank or lender. Upon deciding that short selling your home is the best option for getting free of the associated financial burden, you... 1.Put your home up for a regular real estate sale. The best way is through a good licensed real estate agent who is familiar with handling short sales. This will be your best bet since down the road there will be much more work involved that only a good, short sale experienced, agent should handle. 2. Get an offer from someone interested in buying your home. If you have a Realtor this is when they go to work by advertising your home for sale and hopefully attracting an offer from a buyer. 3.Get the offer you accepted approved by the bank or lender holding your loan. This is where your real estate agent really comes in handy. Remember in order to successfully sell your home for a profit, you must first pay off any loans and/or fees tied to your home. What's left over is what you keep. In short sales you are not able to pay back the full amount you owe, hence you are going to be short whatever you owe on your loan. Due to this fact, the lender or bank must approve you not paying back the full amount owed. This is what's called forgiving your debt.

If you can successfully sell your home and negotiate forgiving your mortgage debt, you'll end up owing nothing more to the bank or lender. Unlike a traditional sale you cannot receive a profit from the sale ( because technically you'd owe it to the lender anyway) but you'll no longer have to pay the monthly payment and your credit score will only take a minimal hit.

There are some drawbacks to short selling, at least there were. The immediate worry of a short sale is having a place to live. Once the sale is complete you no longer own that home so you will have to find another place to live. A suggested strategy would be to plan out and explore all moving options at the start or even before short selling. Further down the road of a short sale comes the tax implications. This used to have a big affect on the decision to go through with a short sale. Until recently, the IRS considered the difference between the final sale price and the amount owed after a short selling your home a capital gain. In other words the IRS considered the difference as income and the IRS taxes income! Now of course this is clearly unfair since the difference isn't income at all, its money that doesn't exist. Luckily the government stepped in 2007 end short sale tax penalties.

For further explanation of the tax penalty changes consult a tax professional. Generally, if you've lived in a home for two out of the last five years it is considered your primary residence and is thus exempt from tax penalties that may arise from short selling. Its recommended that single home owners go ahead if a short sale is the only option. As far as owners of many properties in danger of foreclosure, a short sale may not be the best financial option. The tax penalties are enforced for any properties other than a primary residence as described before. In case you may be thinking that two out of five years leaves room for two primary residences, guess again. Only one property can be claimed as a primary residence. Multi-property owners may want to consider a deed in lieu of foreclosure which is essentially giving your home back to the bank or lender and walking away from the house. This does just about the same thing to your credit as foreclosure but it could save your wallet from taking a huge hit when those in this situation need all the cash they can get.

If you need help in deciding whether or not to short sell your home, there are a few factors to consider. First, are there any better alternatives like working things out with your lender? How far behind in payments are you and how long will it be before you can catch up? How many properties do you own? A licensed real estate agent can help assess the affects of short selling and whether or not it would be a good option for your situation.