First of All, What is a Short Sale?
The legal definition of a Short Sale (of a house) is the sale of a house in which the proceeds fall short of what the owner still owes on the mortgage. In layman's terms, it is when your lender agrees to accept less money for your home than you currently owe to close out the mortgage.
Many lenders will agree to accept the proceeds from the short sale and forgive the rest of the loan when the owner is unable to make the mortgage payments and can prove hardship. Why? Because by accepting a short sale, the lender avoids the lengthy and costly foreclosure process. For the lender, many costs are associated with a Foreclosure lawsuit, including attorney fees, damage to the property, and property maintenance, and if the property goes all the way to auction, they can lose even more.
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When the lender approves a short sale, the homeowner gains an opportunity to avoid or minimize the damaging affects of a mortgage foreclosure lawsuit.
What's So Bad About Foreclosure?
Should your situation get to the point of foreclosure, the lender will take your home and eventually sell or auction the home, using the proceeds to pay off the loan. If the foreclosed property is sold for less than the remaining balance on the primary mortgage loan, the lender has the opportunity to pursue a Deficiency Judgment against you. The judgment can be used to place a lien on your other properties or assets that obligates you to pay the difference. Because you are responsible for every penny the lender lost and all costs get added to the deficiency judgment, what you owe can end up being much larger than you expect. A Deficiency Judgment will destroy your credit and follow you for the rest of your life until you pay it.
Prior to The Mortgage Forgiveness Debt Relief Act of 2007, if the value of your house declined and your lender forgave a portion of your mortgage, the tax code treated the amount forgiven as income, and therefore taxable. Thanks to the 2007 Act, however, there is now a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. There are restrictions, however, on this forgiveness. It applies only to mortgage debt discharged by a lender in 2007, 2008 or 2009, and only to loans given to buy or build a primary residence. For additional properties, you may still be taxed on the cancellation of debt. (For a more in-depth discussion of The Mortgage Forgiveness Debt Relief Act of 2007 and cancellation of debt, visit http://www.irs.gov/individuals/article/0,,id=179414,00.html
To be sure, foreclosure is complicated and far reaching, with implications that extend well beyond losing your home today. Be sure to seek professional legal and tax advice before making a decision to proceed with foreclosure to be certain you fully understand all the negative implications a foreclosure may have on you personally, today and well into you and your family's future.
How Do They Affect My Credit
Often you will hear claims that a Short Sale can save your credit, but what exactly does that mean? Both a short sale and a foreclosure will result in about a 200-300 drop in your credit, or FICO, score, so both will have a negative affect on your being able to get future credit. The amount of time it can take for your credit score to recover from a short sale, however, is generally less than the time it can take for your credit score to recover from a foreclosure. And with a short sale, you will likely be able to buy another home within two years over the three to five-year period required for foreclosures.
Simply stated, it is in your best interest to do everything you can before foreclosure occurs, and to do it as quickly as possible before your options become more limited.
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