If you have found yourself in over your head on your mortgage payments and are at risk of falling behind, a short sale is one way to get out from under your obligations. Get armed with as many details as you can gather about your financial hardship to help support your request to the lender. You should compare short sale alternatives; although working with your lender on a short sale can prevent a foreclosure if you have missed payments, there are some negative points you should weigh against the benefits.
Time is a huge factor in a short sale. Lenders generally require you to list your property for sale with a real estate agent and take proactive steps for selling your house. Both the waiting time involved from start to finish as well as the commitment to meet with a real estate agent, hold open houses, and make your home available for visits from prospective home buyers can be a negative for many homeowners looking to relieve themselves of the financial burden quickly and painlessly. The bank will also require you to submit documents and paperwork to prove financial hardship -- obligations that must be adhered to or your lender can cancel the short sale agreement.
Credit Score Impact
A short sale will certainly have a negative impact on your credit and may be held in a similar regard as a deed-in-lieu of foreclosure or an actual foreclosure. In their book “Credit Repair,” Robin Leonard and Margaret Reiter explain that constant changes in the lending market make the exact impact of a short sale on your credit unpredictable, but you likely won’t be considered for any reasonable type of home financing program for at least two years afterward. Your credit report will be marked with an “AU” which means the account was paid in full for less than the full balance owed, a negative notation that will stay on your record typically for seven years.
Unlike a deed-in-lieu of foreclosure, in which you may receive several thousand dollars in payment to extinguish your mortgage and relocate, short sales leave homeowners empty-handed since all proceeds from the sale go to the lender or lenders involved.
The IRS typically considers forgiven debt from a short sale as income. You may be liable for taxes on the forgiven amount on your mortgage as if it were earned as income. Federal programs such as the Mortgage Forgiveness Debt Relief Act mitigate this negative, and some states offer programs for state taxes. Additionally, the lender or buyer may try to get you to pay upfront costs to complete the sale. The lender may ask you to sign a promissory note that obliges you to pay some of the debt, giving the lender the power to collect the money later on.
- Credit Repair; Robin Leonard and Margaret Reiter
- Credit Management Kit for Dummies; Stephen R. Bucci and Durant S. Abernethy
- IRS: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
Tricia Chaves began her writing career after working in advertising and promotions for entertainment publisher "The New Times." In 2005, she earned her real-estate salesperson license from the state of Ohio and certification for leasing and property management from the Northeast Ohio Apartment Association. She was certified as a life and weight-loss coach and master practitioner of neuro-linguistic programming in 2011.