When a homeowner finds himself unable to meet the agreed upon mortgage payments for their home it can be very distressing. The risk to their credit rating and the possibility of foreclosure can be more than a conscientious homeowner is able to deal with. This is why many have begun to look carefully at the short sale option as a means to get out from under the burden that the mortgage may impose.
While a homeowner may be faced with the loss of his home there are many benefits of seriously considering a short sale; the most obvious would be a release from the mortgage payment obligations as well as relief from the expense of maintaining the home. Another advantage of a short sale is that often the mortgage holder is willing to waive the deficiency owed on the mortgage relieving you of the burden of satisfying the debt after the deal is closed.
Still, with all of the possibilities that can be gained from a short sale a homeowner would do well to weigh all of the factors involved before embarking on such a course. While in many cases such a transaction can prove favorable for both homeowner and the lending institution there are other reasons why one might be wary of taking this step.
The Short Sale and Your Credit
For the most part, may are under the impression that a short sale can have a lesser impact on your credit score than a foreclosure however this is not always the case. According to some real estate experts the impact may in fact be about the same. This will depend on how the lending institution chooses to report the transaction. For example, a financial company may choose not to report the short sale itself but will continue to report your default payments as delinquent on your report. You will have to wait the required amount of time for that to be removed from your credit report.
There are however, other ways that this type of transaction could actually improve your credit situation. If you already have a pretty high credit score the reporting of a short sale could result in only minor damage to your credit history than those who may have a history of poor credit. While those that have a good report may still face the negative impact of a short sale the odds are that they will be able to recover from that hit in far less time.
Considering the fact that it will take just about the same period of time after a short sale as a foreclosure – seven years – for a person to restore their credit it is important for you to discuss with your lending institution how they plan to report the sale to the credit bureau.
The Short Sale and Your Taxes
Another factor that must be considered before executing a short sale is the tax liability that you may incur. In many cases, the remaining balance of debt is often forgiven by the lender, which on the surface may seem like a blessing in disguise. However, it is important to understand that the lender will be required to report the cancelled debt to the IRS, which could quite likely make you liable for taxes on that money. It will be considered as gains on your part so while you may be relieved of the burden of making those regular monthly payments you could be facing a huge tax bill at the end of the year.
According to the IRS, the reason behind this is that the forgiven debt is considered a “gift.” As a result it was considered “income” and therefore subject to being taxed.
However, there are some situations where this rule does not apply. Generally, exceptions can be applied to short sales on homes that are considered your primary place of residence (the place where you live). This type of exception falls under the Mortgage Forgiveness Debt Relief Act.
There are Always Exceptions
This is not to say that having a short sale is not worth it. Every case is unique and carries its own level of risks and rewards. There are other ways where a homeowner may be able to avoid the income tax hit when they’re doing a short sale. If you’re seriously considering doing a short sale to help you get out of your financial burden it would be well worth your while to speak to a number of different professionals to find out just how the decision could impact you and your financial future.
Who to Talk to
In most cases short sales are often handled by real estate experts but you should not limit your inquiry to these individuals. You will also want to discuss your decision with your lending institution, an attorney, and a tax expert that has a history of dealing with short sales. The reason for this is obvious.
The realtor will often tell you that short sales will protect your credit but this statement does not usually reflect the whole truth. While this may be true in some cases it does not apply in every situation. Realtors also cannot give you legal advice on different aspects of selling your property. Always remember that agents are first and foremost concerned about making commissions, which they can only make if there is a sale.
While a homeowner may be seriously concerned about avoiding a foreclosure and at the same time getting out from under the heavy mortgage they are facing, a short sale can sound very promising. In many cases a short sale can be the ideal solution for homeowners in such a situation but it may not be the only answer. It is strongly recommended that before you take the step to do a short sale that you weigh all of your possible options and get expert advice from a number of different professional perspectives so that you not only can get relief from the financial stress you’re under but that relief lasts to support you well into your future.