There are no "one-size-fits-all" answers when it comes to short sales. What works financially for one homeowner may not make sense for another. Before you pursue a short sale, look at the repercussions related to the balance of the mortgage debt, tax implications, credit impact and alternatives. Only when you weigh all the financial implications will you know if the short sale will make good financial sense for you. Usually it comes down to these considerations:
1.) Do you have a legitimate hardship that will make you unable to make your monthly mortgage payment? If you borrowed truthfully, owe more than your house is worth and circumstances outside your control have created an inability to pay back the debt by the agreed upon terms, you should investigate whether or not you qualify for a short sale or maybe even a loan modification.
2.) Do you want to save your credit as much as possible so that you may purchase a home again in the near future? If you have any intention of being a homeowner in the future, saving your credit is critical.Â Anything you can do to reduce negative reporting will have an impact on your ability to borrow in the future.
3.) Are the legal and tax implications acceptable on a short sale for your specific situation? There are legal and tax implications to forgiving debt whether it is a short sale, foreclosure, and or bankruptcy.Â The only way to know how they will impact your specific situation is to consult with an attorney and/or tax professional.
Generally speaking, the credit hit from a short sale is less than a credit hit from a foreclosure or bankruptcy. A foreclosure and/or bankruptcy can affect a borrowerâ€™s credit for up to 7 years.Â However, even with a short sale, if a borrower has missed payments for a long time, the credit hit keeps adding up and eventually may be as bad as a foreclosure.Â This is the reason why it is so important to address the problem as soon as possible.
When you sell your home through a short sale, you will be relieved of the monthly mortgage burden immediately. But whether or not you will be relieved from the full amount of mortgage debt is another matter. One question that I answer frequently is â€œMy house is underwater. Is this an acceptable hardship?â€ Unfortunately, the answer is always â€œNo.â€ The simple fact that a homeowners mortgage obligation is in access of their house value is not an acceptable hardship. The following is a list of acceptable hardships that may be used when submitting a short sale package:
Â· Mortgage Rate Adjustments
Â· Loss of Employment or Reduction in Wages
Â· Business Failure
Â· Medical Hardship
Â· Death in the Family
Â· Military Service
Â· Overwhelming Debt Obligations
Â· Job Relocation
Short Sales are challenging and can try anyoneâ€™s patience, but the reward may outweigh the irritations by saving you years of credit repair. So, if you are in over your head with no end in sight, donâ€™t let your home go into foreclosure, call a Realtor like me with experience in the Short Sale process and see if I can help you.
ADDITIONAL NOTE: Short sale approval by lenders and investors are very impersonal processes.Â Â The hardship letter is one of the few, if not the only opportunity a borrower may have to express their personal sorrow over having to go through a short sale and lose their home.Â Sincere words to this effect may make a difference.
WARNING: Unless extended, the much lauded Mortgage Forgiveness Debt Act expires at the end of 2012. If you have underwater home, then you must decide soon whether or not to proceed with a Short Sale (to avoid a foreclosure) before itâ€™s too late. There is no guarantee that the Mortgage Forgiveness Debt Act will be extended into 2013.
Bottom line, take action now! Donâ€™t stick your head in the sand!
The aboveÂ article provides general information about tax laws and consequences, but shouldn't be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice!