Everyone is talking about Short Sales. Here are answers to some Frequently Asked Questions.
Note: The following are generalized questions and answers, and not to be relied upon by individuals seeking help. Anyone considering a short sale is advised to seek legal counsel. It is against the law for anyone other than an attorney or licensed mortgage broker to negotiate with a bank on the seller's behalf to seek reduction in loan amount or terms. Significant tax issues arise from a short sale, and the seller's credit will be negatively impacted.
1. What is a Short Sale? A short sale happens when the purchase price of a home is not enough to cover the underlying mortgage, liens, and costs of sale including excise tax, commissions, title and escrow, and the seller does not have funds to make up the difference and pay off the bank in full.
2. How does a Short Sale work? In order to transfer clear title, the seller must obtain the bank's permission to accept the lesser amount. As part of that negotiation, the seller and the bank have to agree on whether the bank will forgive the remaining balance, or if the seller will agree to pay it off.
3. Does the bank have to go along with the Short Sale? No, the bank does not have to accept it. The bank may choose to reject the sale and proceed with foreclosure.
4. What are the tax issues? There are many, but the two most common are:
a. Excise Tax: the Washington State Department of Revenue claims authority to collect excise tax on the purchase price plus the amount forgiven by the bank.
b. Income Tax: Consult your tax advisor to determine whether any portion of the sale, including the amount forgiven by the bank, must be reported as income on state and federal income tax returns.
5. What does a Short Sale do to my Credit Rating? Credit Bureaus apply proprietary formulas to compile their ratings, which they do not disclose to the public. However, in general a short sale will negatively impact your credit score. Scores commonly drop buy up to 150 points. Industry experts report that the Short Sale stays on the credit report for 3 to 5 years.