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Money Girl
072 MG Mortgage Short Sales
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Card has no cash access and expires in six months. There's a guest host, Andrew Horowitz from the Disciplined Investor podcast, and today on Money Girl, I will be discussing a term that unfortunately many of us will need to know. Mortgage short sales. During trouble making your mortgage payments or know someone who is, close to foreclosure but hope to avoid it and looking for another way out, well, you're not alone. Today, with the housing market plunge, a slowing economy, gas at $4 a gallon, and massive job layoffs, many people are on the brink of losing their homes. Every day, hundreds of honest, hard-working people who have always paid their bills on time and we're living the American dream, decide to just pack up and walk away. The proof is in the pudding, as we know that foreclosures are at an all-time high. And what's worse is that in a year or two when the housing market begins to even out, those who foreclosed on their homes will be stuck with bad credit and unable to qualify for a loan to purchase a new home. But there may be a better alternative. It's what is now being termed the mortgage short sale. Basically, a short sale is when a financially distraught homeowner, who still owes quite a bit of principle on their loan, agrees with their lender to sell the house for less than the balance of the loan outstanding. The proceeds from the sale are then used to repay the lender. The benefit is that the borrower gets to walk away and owes nothing more and the lender is satisfied because they would probably stand to lose more money if the house had gone to foreclosure status. Short sales are often a last-ditch effort before an impending foreclosure. At that point, everything is happening quite rapidly and in effect what you get is a debt that's totally erased. A good deal? Maybe. You cannot just sell your home for less than the outstanding mortgage and make the lender accept less than is due them. The short sale transaction needs to be agreed to before the house is actually sold. Now, be aware that there are times that the mortgage lender won't accept the proposition of a short sale. If there is a co-signer on the loan that might be able to repay the balance, the lender may wish to attempt to have them repay before considering a short sale. If the lender assesses the property and believes that it would be cheaper to repossess, repair, or resell it, they may take that route. If the lender has too many other properties in default, they may not feel that they can afford to take a hit on that particular property. In these cases, the property will likely be turned down for a short sale and then you will have to find an outside buyer or if you cannot make the monthly payment, you will be in default and have the property foreclosed. There is one important gotcha that you need to be aware of if you're considering the mortgage short sale. The difference in the amount that was originally due to the amount that is actually paid back will be considered a gain for tax purposes. So if you owe $200,000 on your mortgage and you short sale it for $100,000, you will receive a $1099 at the end of the year for $100,000. The difference, which will be taxed as ordinary income, you have effectively turned part of the debt due to the bank to a tax due to the federal government. There are always two sides to any equation. So on the opposite end and if you're looking to invest in real estate, short sales may be right up your alley. They're quick, you can get a property for below market value and many of these homes are in good condition. There are several ways to find out about short sale properties. You can look at the classified ads for must sell, motivated seller and vacant postings. You can even consider driving around looking for for sale by owner signs in the front yards. Sometimes you'll see signs posted along freeway on ramps, your shopping centers and other areas that say I buy houses and a phone number. You can post the same ones with your phone number in areas that you're looking to buy. Down on their luck and destroyed homeowners will potentially call you for more information about what you're willing to offer. Use any professional contacts you have such as mortgage brokers, accountants, insurance agents and attorneys. Lastly, you could offer a referral fee to your friends, family, neighbors and any other service people you know like your gardener, handyman, pest control, plumber, etc. You may know them to be just in their business, but you never know who may have a successful lead. Short sales are creating opportunities for people to get out of financial hardship or take advantage of a weak market. Whatever your financial goals, a short sale is a possible option with a lot of benefits on either side. Chiching, and that's all for now. Courtesy of Andrew Horo, it's guest host of Money Girls Tips for a richer life. Thanks for tuning in to Money Girl. This is Andrew Horo, it's sitting in for the Money Girl, listen to my weekly podcast and get my new book, The Disciplined Investor, Essential Strategies for Success, now available on audiobook at audible.com and on iTunes. As always, everyone's situation is different, so be sure to consult a tax or financial advisor before making the important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized professional advice. Thanks for listening. Introducing Wendy's new saucy nugs, the nugs you love covered in your favorite sauces. So no matter what flavor you're craving, Wendy's has you covered. Grab Wendy's new saucy nugs today. 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