A short sale is a sale of real estate property where the proceeds from selling the property are less than the total amount owed on the mortgage. Many people believe that a short sale is the best solution when struggling to pay their mortgage. However, a short sale can come with many unforeseen consequences and may not always be the best option for everyone.
Before deciding on a short sale of your home, here is what you need to know:
1. Your Credit Score May Still be at Risk
A common short sale fallacy is that a short sale will save your credit score. Unfortunately, the reality is that short sales, foreclosures, and deeds in lieu of foreclosures are all considered “not paid as agreed” and have the same implications on your FICO score. Therefore, if you were considering a short sale of your home in an attempt to save your credit score, you might want to reassess following through with a foreclosure.
2. You Might Have to Pay the Remaining Mortgage Balance
Another common misconception about short sales is that the home owner’s obligation to pay off the remaining debt on the mortgage will be canceled. Although this scenario is possible, it only holds true if the lender explicitly agrees to free you of your responsibility for repayment. When a lender approves a short sale, they are agreeing to remove the lien on your property, but are not necessarily agreeing to cancel your responsibility of having to repay the loan in full. Some lenders may reserve their right to collect the remaining balance in the fine print of their short sale approval documents. Other lenders will ask sellers to sign new, unsecured promissory notes before approving a short sale. Either way, you will still be forced to pay the remaining balance on your mortgage. However, if the lender does agree to cancel the remaining debt on the mortgage, make sure you get it in writing to prevent any further charges in the future.
3. You Could Owe Taxes on the Deficiency
Even if your lender absolves you from the obligation of paying for the deficient amount after a short sale, you still might not be completely off the hook. There is a good chance that you could owe taxes on the forgiven debt if the IRS considers it income. In this case, you may owe federal and state income tax on the deficiency unless you qualify for exclusion under the Federal Mortgage Forgiveness Debt Relief Act of 2007. Only if you meet the requirements for exclusion, will you be exempt from paying taxes on the deficient amount.
4. A Short Sale May Not be a Quick and Easy Process
A short sale can be a long, difficult process that may take months with no guarantee that it will ever close. Before committing to a short sale, make sure that you have plenty of time to finalize the closing before your house is foreclosed on. You will also need approval from everyone with an interest in your property before you close, including your insurance company and all creditors. It is also important to get all the approvals ahead of time to avoid unexpected delays at the time of closing.
To determine whether a short sale is right for you, contact a Miami Foreclosure Attorney. A short sale is not your only option. Our experienced foreclosure attorneys at Graham Legal will help you find the best solution. To learn about what foreclosure alternatives are available to you, give us a call today.