If changes in your financial situation have caused you to get behind on your mortgage and you find yourself facing foreclosure, you may be considering a short sale as a way to remedy the situation. Defined as a process in which the lender allows a beleaguered home seller to accept a purchase offer for less than the amount of the mortgage owed, the short sale can provide a path to avoid foreclosure. However, home sellers should be aware that agreeing to a short sale offer can have a serious impact on their financial future and leave them responsible for additional costs after the sale. If you fear foreclosure and are considering a short sale, the following information will help you understand the risks you may face.
Impact on Credit Score
Because a short sale does not satisfy the mortgage debt fully, it will still have an adverse effect on the seller's credit score. Sellers considering a short sale should understand that while a short sale may not be as damaging as a foreclosure, it is still considered a serious mortgage delinquency that will lower their FICO® scores and negatively affect their credit for years afterward.
Another issue that sellers can face after a short sale is being taxed on both the state and federal level for the amount of the mortgage that was forgiven during the short sale process because it is considered income. Some or all of this tax burden may be able to be excluded under certain circumstances, such as if there was a serious decline in the seller's financial situation or in the physical condition of the home being sold, but sellers must be aware of the potential tax issues they face, prior to agreeing to a short sale.
Issues with Leftover Mortgage Debt
Sellers should be aware that the short sale process does not always cancel the entire mortgage debt. In fact, in some instances, the lender may require the seller to agree to sign an unsecured note for the amount of debt not satisfied by the short sale. Lenders can also insert wording into short sale documents that make the seller responsible for the amount of the remaining debt, above the amount of the short sale. Sellers who do not read all short sale documents carefully can mistakenly sign these agreements without realizing it
In many cases, a properly negotiated short sale can be useful in helping sellers avoid a foreclosure, but there are serious risks to consider. Before accepting any short sale offer, sellers should protect their interests by having a reputable real estate attorney (such as Colin W. Robinson Attorney) examine all documents and oversee each step of the transaction.Share