Featured News 2014 When Is a Short Sale a Good Idea?

When Is a Short Sale a Good Idea?

In a short sale, a house is sold for less than the sellers still owe on the mortgage, creating a deficiency. Yet there are times when a short sale can be a viable alternative to foreclosure. Before choosing this route, however, you need to be aware of how your credit score would be affected, what happens with the outstanding mortgage, how there could be tax issues, and more.

First of all, what will a short sale mean for your FICO score? For many, the primary reason that people choose a short sale is to preserve their credit. Unfortunately, a short sale is almost the same as a foreclosure for your credit score. While a short sale can save you from foreclosure, it can't save your credit score from taking a hit.

What about the mortgage? In many cases, a short sale can relieve you of the obligation to pay off your mortgage—but not in every case. For one thing, your mortgage is made up of two different components. One is your debt to the lender. The other is the security, what you use to back up the debt. A mortgage is a secured debt because your house is the security, or collateral, for that loan. With a short sale, the lender is removing that lien from the house, waiving the right to seize the house and sell it themselves. But that does not always mean they are relieving the seller of the need to pay outstanding mortgage payments.

There are times when a lender will not allow the short sale unless the seller signs an unsecured promissory note, which means the seller still has the obligation to pay the lender. Other lenders are not so forthright. When they approve the short sale, the fine print might say that they still have the ability to collect the outstanding mortgage from you. This means that right after the short sale, a lender could go after the seller for the debt, sometimes using a debt collection agency, or at other times filing a lawsuit against the seller.

Then there are the taxes to consider. Let's say that your lender does forgive the deficiency. You could still owe taxes on the canceled mortgage after a short sale. The proceeds of a short sale are viewed as income, and therefore taxable. However, under the federal Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude the sale from your income if you meet certain requirements.

Other Short Sale Issues You Need to Know About

The repercussions of a short sale are far-reaching, and really, everything rests on the specifics on your case. Here are some more things you should weigh before you plunge ahead:

  • There are alternatives to a short sale. And we're not talking about foreclosure. You may be able to refinance the mortgage, modify the terms of your loan, or obtain a deed-in-lieu of foreclosure.
  • You may not have enough time for a short sale. You have to put the house on the market, get someone to buy the house, and work with your lender on a number of issues. A short sale may not move fast enough to beat a foreclosure.
  • Second mortgages require separate approval. If you have more than one mortgage, each lender has to approve the sale.
  • Beware of short sale scams. There are many frauds out there seeking to take advantage of the high volume of short sales that are taking place.

If you want to know what your options are and how to uphold your legal rights in this time, be sure to call a real estate lawyer today!

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