Things to Think About If I Want to Short Sale My Home
A short sale occurs when you sell your home for less than the mortgage balance. It is an alternative to foreclosure and carries a different set of ramifications and concerns. A short sale requires the lender's approval, may result in the lender coming after you for the balance of the debt, may take a very long time and is not going to help your credit score.
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Will I Qualify?
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A short sale requires your lender's approval. Your lender wants to be certain you are not walking away from your mortgage debt because you want to, but because you have to. You must have a hardship that prevents you from being able to meet your mortgage obligations. Some lenders qualify you for a short sale upfront, before you put your home on the market. Others make you wait until you receive an offer. They also want to see a comparative market analysis on the property to make sure the offered price is at or near market value.
Will the Lender Come After Me?
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Assuming you qualify for a short sale, the next question is whether your lender will try to hold you responsible for the full loan amount--that is, the difference between what it received in the short sale and the mortgage balance. In some states, such as California, state law mandates a first-mortgage lender forgive a borrower all mortgage debt for a short sale of a one- to four-unit residential property. But you will be on the hook for a second mortgage. In some states a lender can go after you on all loan types. Because the lender has to sign the sales purchase contract, you can include a debt forgiveness clause as a contingency in the contract. If the lenders sign it, you're off the hook. If they don't, you may want to reconsider going through with the deal.
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How Will It Affect My Credit?
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Experian, a national credit-reporting agency, says that a short sale is usually reported to it by lenders as a "settled" account--that is, an account on which the borrower and lender reach an agreement whereby the borrower repays less than what was owed. Settled accounts, according to Experian, have a very negative impact on your credit. A foreclosure is only marginally worse than a short sale with regard to credit impact.
How Will it Impact My Taxes?
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Before 2007, any amount of an unpaid mortgage was designated as taxable income by the IRS. The Mortgage Forgiveness Debt Relief Act, in effect from 2007 through 2012, exempts unpaid mortgage debt. Some states, such as California, have passed similar laws to exempt the debt from taxation at the state level. Others have not.
What Are My Alternatives?
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If you have a job and are able to pay your mortgage, your alternatives are many: stick it out and wait until the market returns, try to negotiate a principal reduction in your loan balance with your lender, find out if your lender will accept a deed-in-lieu--that is, will the lender let you deed the lender the property in lieu of foreclosure--or stop paying your mortgage and await foreclosure. If you are unable to pay the mortgage, try for a loan modification that might lower your payments, if not your loan balance. Foreclosure is always a last resort regardless of your circumstances.
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References
- Photo Credit Sold Home For Sale Sign on Burst image by Andy Dean from Fotolia.com
