Ask Karen Gibbs

Veteran business correspondent Karen Gibbs answers your personal money questions and addresses current topics that affect YOUR finances on a daily basis. Karen is the financial expert in your corner--no question is too basic or too small. Karen boils down the issues simply: here's what you need to know, and here's what you need to do. Send your money questions to AskKaren@mpt.org and post your comments below.

24

August

Selling a House: Quick Sale VS. Short Sale

Karen Gibbs

 Hi Karen, I want to sell my house.  What’s the difference between a quick sale and a short sale?

 - Lee, Pikesville

 For Sale SignHi Lee, and thanks for your question.  Let’s start with a quick sale then tackle a short sale.

quick sale is a sale where the homeowner is motivated.  He or she may be moving or has bought another house and doesn’t want to carry two mortgages.  They could be in financial straits and just need the cash.  Whatever the reason, the transaction can take a little as ten to thirty days and no middle man needs to be involved.  For sale by owner puts the onus on the seller to do all the leg work that a real estate agent would normally do, but the time saved may be worth it.

short sale is when you contract to sell your house for less than the outstanding balance on your mortgage.  It may be an option if you are facing foreclosure and your mortgage lender is open to the option of a short sale.

In a foreclosure, the mortgage lender will take possession of the property for non-payment of mortgage, or default.  It is a legal process that must be followed after the fourth month of non-payment.  If the homeowner and the mortgage lender cannot reach some sort of alternate payment agreement or have had no contact at all, a sale date is set. 

The owner is allowed to stay in the home until the sale date, and may be offered “cash for keys” to move out of the premises. 

Foreclosures hurt your credit standing and will stay on your credit report for ten years, and you may be unable to buy another house for at least seven years.  There are also tax consequences.  You may have to pay capital gains taxes if the fair market value of your house is more than the purchase price plus improvements.  You may be eligible for a possible exclusion if you meet certain criteria, but most people want to avoid foreclosure.

And that brings us back to a short sale.  Your mortgage lender must agree to accept less than the amount owed as they will be absorbing the loss.  You will not be obligated to the remaining balance, but you may have to pay taxes on the amount of debt that was cancelled.

The mortgage lender will also want some detailed information on why you are choosing a short sale.  There must be some change in your status and situation compared to when you bought your home.  Just being underwater or upside-down is not enough.  Have you gone through a divorce; a major medical challenge; lost your ability to earn income?  Is this a permanent situation or have you done something to try to mitigate the challenge you’re facing?

Short sales may take a minimum of 45 days, often times much longer.  If approved, and you’re not 60 days in arrears, you may be eligible to buy another home, immediately.  If you are more than 60 days in arrears, your credit will take a modest hit, but you are still eligible to purchase another home after two years.

Lastly, there are tax consequences to a short sale.  The mortgage lender will cancel the remaining mortgage obligation, but will report the amount cancelled to the IRS, who will treat that debt cancellation as ordinary income and will tax it as such.

In summary, be prepared to do lots of work for a quick sale.  Hope your mortgage lender says yes to a short sale, and use foreclosure as a last resort. 

 

Good luck! 

 - Karen

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