Many people purchase their homes thinking that they would be staying in it for a long long time, but then unpredictable events happen wherein they are forced to move.
Homeowners forced to move due to some unforeseen or unexpected events, like job relocation or reassignment, divorce, death, or maybe financial difficulties.
Of course, when homeowners move, they will have to sell their house, which before might not have been a problem, but in our current market has become a problem for most people because of the falling housing prices.
Housing prices have been going down in some regions, over the past year. It’s harder to move now because the prices are going down and the profit is not sufficient for you to settle the outstanding loan as well as the closing costs.
There are many things that could happen as a result of this; Default, bankruptcy, or foreclosure. All of which will have a negative impact on your credit rating for a long time.
A good option that has a comparatively lesser impact on your credit would be to do a short sale.
A short sale is when the lender agrees to accept a mortgage payoff that is less than outstanding loan.
Typically, banks or lenders would not want to do that, but the foreclosure is often a long and expensive process. Banks are under strict regulations and if a certain percentage of their outstanding loans are considered bad debt, they can be fined and sanctioned. So, banks are actually eager to get rid of the property, so long as it does not hurt them more if they do a short sale.
You have to be truly experiencing financial hardship, to be eligible for a short sale. You will have to disclose your assets, and there are documents that the borrower needs to submit to the lender to get the short sale approved; Financial statements, tax returns, pay stubs, medical bills, stocks, bonds, divorce decree, etc. Along with these documents, you will need to write a “Hardship Letter” to explain your financial difficulties.
You will have to put your house on the market. Once you sell the property, you will have to supply more documentation; A copy of the purchase agreement, a copy of the comparative market analysis, and a net sheet that shows how much you net from the sale of the property
The amount of debt forgiven is considered as income and is taxable, and you will have to report the income to the IRS.