The Financial Skinny: Short Sales

Short sales are on the rise – accounting for 22% of all home sales in 2012, according to a study by RealtyTrac. A timely term for this week’s financial skinny:

Short Sale: Defined

“Short sale” is a type of transaction in which a property is sold for less than the balance owed on its mortgage. It’s a strategy used by underwater homeowners who owe more than the property is worth. With cooperation from a homeowner’s lender, a short sale can be a great alternative to foreclosure.

Short Sales & Uncle Sam

Increased short sales, especially in the last quarter of 2012, could be a result of homeowners acting to take advantage of tax incentives that were set to expire at the end of the year. The Mortgage Forgiveness Debt Relief Act was set to lapse on New Year’s Eve. Instead, the benefit has been extended through 2013, allowing homeowners to exclude income from the remaining debt balance on their principal residence. In other words, the amount homeowners fall “short” on won’t be taxed – providing more incentive to unload underwater mortgages.

Who’s Eligible?

Most short sales are facilitated through the government’s Home Affordable Foreclosure Alternatives program, which is available for mortgages backed by Fannie Mae and Freddie Mac. To be eligible you must have obtained your mortgage on or before January 1, 2009, the mortgage must be valued at less than $729,750, you have to prove financial hardship and not have bought another property in the past 12 months. Other homeowners may be eligible for short sale pending negotiation with their lender.

Impact On Credit

Finally, before you put out that “for sale” sign, it’s important to weigh the impact a short sale could have on your credit score. According to FICO, the company that sets the standard in the credit scoring industry, short sales will have some negative impact on your credit score, as they’re “not paid as agreed” resolutions. And, despite what your realtor might say, short sales have the same effect on your score as a foreclosure. That means the hit will stay on your credit report for a maximum seven years and lower your score by 100-300 points depending on the health of your score prior to the sale.

Photo Courtesy: 401(k) 2012

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