However, it is a much better option than foreclosure, which can drop your score as much as 250 to 280 points for as long as seven years.
Therefore, it is always in a homeownerâ€™s best interest to short sale or sell his or her home by other means before forfeiting it back to the bank/lender.
One very important item that must be top of mind when thinking about short selling your house, however, is whether or not you will be hit with a deficiency judgment.
In a short sale transaction, a bank agrees to sell a home for less than what it is owed by the original borrower. And even though a bank may sign off on the deal, it could still hold the original borrower accountable for the difference on the short sale.
In other words, if you bought your home for $300,000 and sold it as a short sale for $215,000, you could still potentially be on the hook for $85,000.
For most people a deficiency judgment is the final financial blow that forces them into total economic submission: Bankruptcy.
Vanessa Corey of Fredericksburg, Va., shares her sad short sale tale with CNNMoney.com:
â€œMy understanding was that the deficiency was negotiated away. Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it.â€
How do you avoid getting slapped with a deficiency judgment in a short sale?
It must be addressed during the negotiation and a condition of the sale that you ask for and are granted a release. All that means is you request that the bank/lender â€œreleases you from further financial obligationâ€ as soon as the deal closes.
That one small request makes a huge difference.
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