Sometimes when I read the material on my colleagues’ web sites, I almost get the impression that the idea of doing a short sale — a sale where the lender approves a payoff amount less than the value of the loan — is being promoted to sellers almost as a normal sale.

It’s not.  To be sure, if you simply can’t pay off your mortgage and are facing foreclosure anyway, a short sale may offer some advantages, the most important of which is that it may prevent non-purchase money lenders from getting a deficiency judgement against you (refinance or home equity lines of credit are typically non-purchase money and hence the lender has a deficiency judgement as one option in a foreclosure situation).  But you should also be aware of these facts about a short sale.

You Will Be Asked to Show Hardship, and You Have to Tell the Truth
In order to approve a short sale, a lender has to believe that they’re not going to get their money any other way unless they do, and this typically means that you have to show that you can’t pay for some important reason — sickness, death of a spouse, loss of a job, or the like.  Also, if you’re paying off a $100,000 loan and you have a six figure income and good credit, don’t expect the bank to welcome your request that they take a loss.  So you’re going to have to show a hardship, and be aware:  if you lie, that’s loan fraud.

Short sales will not “Save Your Credit” (At Least Not All of It)
If a Realtor® suggests that you can save your credit with a short sale, run, don’t walk.  There is some debate over how much impact a short sale will have on your credit, and it also depends on how the bank reports it, some of which may be negotiable.  However, in general you should only go through the short sale process as a last resort.   Although a short sale may not impact your credit quite as much as a foreclosure, you should still expect to it to have a strong negative impact on your credit.  Whether it’s “as bad” as a foreclosure or bankruptcy or “almost as bad” depends on who you ask.

Once the Short Sale is Over, You May Owe Taxes
There are two possible tax liabilities to a short sale.  First, if the sale results in a gain in value of the property, you may need to pay capital gains tax, regardless of the value of the notes involved.  Secondly, if the lender accepts less than full payment, the difference may be reported to the IRS as taxable income to you.

blog comments powered by Disqus