Although some economic indicators hint that the U.S. economy is moving toward a recovery, home values are still suffering from a serious economic hangover. Many home owners are putting off a sale until prices recover. But some owners must sell at a loss
San Mateo, Calif. (Vocus) October 28, 2009
Although national housing markets have not necessarily recovered from the economy's recession, some home owners must sell immediately, even at a loss, and free online consumer portal Bills.com has six suggestions to ease the pain of a home sale that leaves sellers in debt.
"Although some economic indicators hint that the U.S. economy is moving toward a recovery, home values are still suffering from a serious economic hangover. Many home owners are putting off a sale until prices recover. But some owners must sell at a loss," said Ethan Ewing, president of Bills.com. "Selling a home for less than the debt on the loan -- called a 'short sale' -- is not desirable, but sometimes it is necessary for those who face major financial hardship."
Statistics on home price trends vary. One August report indicated that 80 percent of real estate markets increased in median home value over the previous year. A separate July report found that home values are down 21 percent from their peak in the second quarter of 2006. However, July was the sixth consecutive month that the decline in national home values lessened.
Overall lower home values mean that many home owners are "upside down" in their mortgages. This term means that they owe more on a mortgage than the home is now worth. "This is especially true in the current real estate market, because low down payments and cash-out refinance deals were the norm in the past decade," Ewing noted.
Home owners who are facing a possible short sale should consider these points:
1. Know what qualifies for a short sale. Several factors make a home a candidate for a short sale. Typically these are a general drop in home values (such as has happened in many markets), a mortgage that is near default status, or a home owner who is unable to pay due to hard times.
2. Find the right real estate agent. The short-sale process is specialized. Lenders have stringent requirements and might ask agents to take a lower-than-standard commission. Look for agents with experience.
3. Talk to the lender. If a home is worth less than the mortgage amount, sellers will need special permission from the lender to sell the home at a loss for its current value. If the sale stems from financial hardship, home owners will need to prepare a hardship letter explaining why they need to sell. "Remember that some lenders will be open to the possibility of a short sale to avoid the alternative of foreclosure," Ewing said. "If you are a good borrower hit by bad times, make sure to communicate this effectively to the lender."
4. Understand tax consequences. In some cases, a lender forgives the difference between what is owed and the selling price. Lenders can classify that forgiven debt as income to the seller, which means that the seller would be required to pay income tax on the amount. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows some home owners to exclude that income. This exclusion primarily applies to those whose home was foreclosed on or who had debt forgiven as part of a loan restructuring. Individuals who are truly insolvent (total liabilities are greater than total assets) also can file IRS Form 982 declaring the insolvency to have the tax waived. Sellers should consult a licensed tax advisor to learn whether these exceptions apply to their situation.
5. Know it will impact credit. A short sale is recorded on a credit report as a pre-foreclosure proceeding. As such, it will damage credit scores. Still, it may be the best alternative for some homeowners.
6. Consider alternatives. If paying the mortgage is the problem – and there is no desire to sell -- some home owners have options available. Some lenders will consider a loan modification, which seeks a permanent change to the loan, such as lowering the payment and extending the loan's term, or rolling delinquencies into future payments. Government programs such as Hope for Homeowners also fall into this category. Another option is a "deed in lieu" of foreclosure, which essentially allows the borrower to return the title or deed of the property – giving the home back – to the mortgage holder to avoid foreclosure. The borrower forfeits equity in the property, but avoids a foreclosure on his or her credit record.
"Short sales are hard facts of life following a serious real estate downturn like the one our nation has undergone," Ewing said. "Do your homework before agreeing to a short sale. Becoming a knowledgeable seller will help make the process as painless as possible."
Based in San Mateo, Calif., Bills.com is a free one-stop portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt consolidation, insurance, mortgages and other loans. Bills.com holds the No. 273 spot on the Inc. 500 list for 2009.
Bills.com and its sister companies, Freedom Debt Relief and Freedom Tax Relief, are wholly owned subsidiaries of Freedom Financial Network, LLC. The company has served more than 50,000 customers nationwide since 2002 while managing more than $1 billion in consumer debt. Its RSS feed is available here.