Should You Short Sale Your Home?
A short sale occurs when a homeowner decides to sell their house for less than the amount owed to the lender. In most cases, this happens when a home’s value falls. A short sale can only happen if the lender approves it since they will not be getting all money back on the loan.
A short sale is different from a foreclosure and a great alternative when a homeowner is no longer able to make the mortgage payments. Lenders tend to approve short sales as they stand a chance of making more money on a short sale rather than going the route of a typical foreclosure which can be costly and time-consuming.
Effects of Short Sale on Credit
It is true that a short sale is a great option to have when you are having trouble making your mortgage payments, but assuming it will not affect your credit rating in any way is not true. When you short sale, you have essentially “not paid as agreed” and this will reflect in your credit file. Even if you don’t use the option to short sale and simply miss your home loan payments, it will affect your credit rating and FICO score.
How Long Does a Short Sale Take?
A short sale can take anywhere from several weeks to a few months to get approved. It is important for homeowners to be aware of this and be patient. A short sale negotiator who is familiar and experienced in dealing with such situations can be of great value in helping to move the approval process quickly.
Tax Obligation After Short Sale
When a lender agrees to cancel or forgive your debt, the amount of forgiven debt can be taxable in some conditions and non-taxable in others. It is important to be aware of this before going ahead with a short sale. As per the Mortgage Forgiveness Debt Relief act of 2007, amounts up to $2million will not be considered taxable if:
- You have been using the house as your principal place of residence for at least two out of the previous five years.
- The home undergoes significant improvements using the debt amount by buying or building additional features.
The above law was extended to be applicable till 2013 and a new law is being worked on by lawmakers currently.
Debt After Short Sale
When you opt for a short sale, it does not mean that you are not obliged to pay the remaining balance on your mortgage. A mortgage includes a promise to repay the lender as well as a lien on the property to secure the loan. When the short sale is approved by a lender, it only means they are retracting the lien on the property. You would still be obliged to repay the lender’s loan unless your lender agrees to cancel it as well. In order to be completely off the hook after a short sale, it is best to ask your lender about debt obligations and get a written answer. If you are looking to short sale your home, contact our experienced real estate agents today for more information!