What are the consequences of implementing a short sale?

1. Expect derogatory credit. In the vast majority of short sale situations the seller maintains a satisfactory credit rating however, derogatory credit is a possibility.

2. Expect tax liability. A new IRS law is currently pending which will require the issuance of a 1099C for the difference between the loan amount and the pay-off amount. For example, a property with a loan amount of $300,000 short sells for $240,000. Theoretically, the lender can issue the seller a 1099C for $60,000 with applicable taxes due to the iRS.

In reality only about one half of the banks issue a 1099C because there are usually several parties involved. None of the parties involved (lender/bank. Fannie Mae/Freddy Mac or mortgage insurance) are willing to accept the responsibility to issue the 1099.

There are several davantages to the short sale. The seller can reduce his/her debt, avoid foreclosure, maintain credit worthiness and most importantly, get out from under a mortage.

However, there are also some disadvantages. Bad credit and tax liabilities can occur. In addition, any short sale from a VA loan requires payment in full (for the full amount) or the seller loses all veteran benefits including death, educational and medical until the balance is paid.

The key decision makers in the short sale process include the lender, investor and the mortgage insurer (MI/PMI). The lender (sometimes also the “investor”) typically gathers all the information required to consider a short sale package. The lender will then calculate what the actual loss is and then either approve or disapprove the package. The final decision maker is the mortgage insurer. MI/PMI will only approve a package that has been signed off by the investor and require the most comprehensive support information. The process takes some time and can make a short sale transaction a very slow process.

Resource: http://activerain.com/blogsview/102544/The-Short-Sale-Part

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