Misconceptions abound when the topic of short sale facts comes up in conversation, or when a homeowner is looking at this kind of sale. Let’s clear up the misconceptions, and while we’re at it, let’s drop some very good news on you.
The most common myth is that a homeowner won’t be able to buy a new home for months or years. The truth is the lending market varies widely in the requirements for buying a home.
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SHORT SALE FACTS ON BUYING A NEW HOME
If you have to short sale, you may qualify for an FHA-approved loan, provided the new house you are buying is cheaper than the one you just sold.
If you’re trying to get out from under a heavy mortgage, then buying a cheaper home is what you want to do anyway.
The Department of Housing and Urban Development (HUD) oversees the FHA. The regulations say you must:
• Be current on your mortgage.
• Be current on all other debts related to the loan
• Make sure the short sale eliminates the mortgage.
In other words, you’ll need to negotiate with the bank to make sure the short sale pays off your mortgage completely. You can’t owe anything and still qualify for the FHA home loan insurance.
SHORT SALE FACTS ON THE MORTGAGE DEBT RELIEF ACT
If Congress does not extend the mortgage debt relief act, then the difference between the short sale price of your home and the amount owed must be declared as income on federal taxes.
Fortunately, Congress has renewed this law each year, and the relief act has been extended through 2025, currently expiring on January 1, 2026.
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SHORT SALE FACTS ON YOUR CREDIT SCORE
A lot of people worry a short sale will ruin their credit. This is another of the short sale facts that can be true, but doesn’t always have to be.
The truth is, yes, you will take a hit, but how badly your credit score will be affected depends largely on two things:
• Your mortgage payment history
• What the bank reports
You can negotiate with the bank to try to get a better report to the credit bureaus following the short sale.
However, if you’ve missed or been late on a mortgage payment, there’s little you can do about that. The damage is already done.
SHORT SALE FACTS ON YOUR MORTGAGE PAYMENTS
Some people think they cannot short sale a home unless they are behind on the payments. This is not necessarily true.
Banks are more willing to discuss a short sale with someone who’s making payments late, but you can still discuss it with the lender.
Explain your situation. Bring proof of how your family’s economic situation and finances have changed for the worse.
SHORT SALE FACTS ON HOA DUES
Home owner association (HOA) dues need to be kept current. In a list of short sale facts, this one does not apply to everyone.
If the HOA membership does apply to you, then know any unpaid dues have to be settled at closing. Sometimes the bank will help cover this cost, but don’t count on it.
The new buyer may not have to pay the fees either. If no one pays the HOA costs, then the HOA can come after your personally, and that will affect your credit.
Here’s the takeaway of short sale facts.
Myth: After a short sale you won’t be able to buy a new home for months or years.
Fact: You may qualify for an FHA loan, if the new house is less expensive than the one you sold as a short sale.
Myth: A short sale will ruin your credit.
Fact: Your credit will certainly take a hit, but your mortgage payment history and what your bank reports will determine how bad the hit is. It may or may not ruin your credit.
Myth: You need to be behind on payments to short sale your home.
Fact: Though your bank will be more willing to discuss a short sale with you if your payments are late, this is not necessarily the case.
Myth: HOA dues must be current.
Fact: This doesn’t apply to everyone. The bank may help with the cost. However, if the bank or the buyer don’t cover it, then you’re on the hook for it.
Also, on the list of short sale facts, here’s one that’s encouraging. Congress has extended the Mortgage Forgiveness Debt Relief Act through the year 2025.
Without this extension, the difference between the short sale price and the amount owed on the home would have needed to be declared as income on federal taxes. Fortunately, it was extended.
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