Some sellers will opt to take the short sale route even if it’s not the ideal situation.  This decision is often made because it is the better option when faced with foreclosure.

A short sale is when your property is listed for sale for an amount less than the outstanding mortgage.  This type of sale is becoming more common in the real estate market as a short sale does far less damage than going through foreclosure.

Are you aware of the consequences and disadvantages of pursuing a short sale vs. foreclosure?

Here are some of the consequences you need to know before choosing this option.

Credit Rating

Many homeowners prefer a short sale rather than a foreclosure because they believe there’s less of a stigma attached to a short sale and it won’t cause as much damage to their credit as foreclosure. Please note that a short sale may lower your credit rating and will likely be reflected on your credit report.

A short sale does not have the same drastic effect as bankruptcy or foreclosure, but future lenders might consider this if/when the seller attempts to secure another mortgage.

Cancellation of Mortgage

The most common reason for listing a property as a short sale is because the mortgage payment is too high for the homeowner to manage. If granted, a short sale allows the property owner to save on the cost of the mortgage. Likewise, it can also save the lender from the expense of foreclosing on a home where the loan is in default and payments have stopped however the sale will result in a loss on the loan.

Tax Consequences

All debt cancelled as a result of a short sale is taxable income according to the Internal Revenue Service. However, the Federal Mortgage Debt Relief Act of 2007 says that married taxpayers can exclude up to $2 million of forgiven debt through the short sale of a principal residence.

Potential tax consequences is one of the biggest concerns that people have about doing a short sale or loan modification. The law was immediately effective in 2007, when it became obvious that some legislation was needed to remove the tax burden from financially stressed owners.

Deficiency

The deficiency amount is the difference between the selling price and the outstanding loan amount.  This deficiency can be waived by the lender at the time of closing or the lender may continue their efforts to recover this balance.

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Do you have general real estate requests or need a Realtor to represent you in South Lyon, Novi, Farmington Hills, Livonia, Northville, Plymouth, or in any other surrounding Oakland County area? Feel free to contact me.