Homeowners who are facing foreclosure often opt to go for a short sale instead. It is certainly true that if they are unable to get a loan modification or are otherwise incapable of paying for their mortgage, it seems there are no alternatives but to go for a short sale. Indeed, choosing this is often a better option than a foreclosure, because this has such negative effects. However, there are some disadvantages associated with foreclosures as well and it is important to be aware of these so that you can prepare for their effect, or reduce them to some extent. The first thing to realize is that, with a short sale, you will be selling your property for less than what you still own on your mortgage. This will only work if your lender agrees to it.
Losing Your Home
First of all, you must understand that you will lose your home during a short sale. A loan modification or other measure will allow you to remain in your property until your financial situation changes, but this is not the case with a short sale. You will have to sell up in order to pay off your debts.
Furthermore, when you go for a short sale, you will not actually clear the balance of your mortgage. It is possible that your lender will place a deficiency judgement on you, to force you to pay the difference. You can avoid this by putting a clause in your short sale agreement, however, but you must check on this yourself.
Many of us have a secondary mortgage, a secure loan or any other type of credit. You will always owe this, regardless of your short sale agreement. There are a number of government endorsed programs, such as the Home Affordable Foreclosure Alternative that could help you cancel this debt, but it is not guaranteed that this will actually work.
Your Taxable Income
The IRS believes that a forgiven debt is a taxable income. This means that if your debt is large, your tax bill will be large too. You can, however, rely to some degree on the Mortgage Debt Relief Act, which came into force in 2007. This allows you to include the debt cancellation income, but only if the house that went up for short sale was actually your primary house of residence.
Damaged Credit Score
If you do choose a short sale, this will be noted on your credit file. It will take at least two, but usually three years before you will be able to apply for a mortgage again. On the other hand, if your property is foreclosed on, this period is as much as seven years.
It Takes a Long Time
A short sale can take a long time. It is not uncommon for the process to take six months from the moment of receiving an offer, which is after the process of talking to your bank. However, this also means you have all of that time to find alternative residence.