First of all, I am not an Attorney or a CPA and I don't practice Real Estate in your State however, I have some experience with Short Sales and I hope my insight helps you.
Short Sales are Foreclosure alternatives. Being an "alternative" doesn't mean it's better. The truth about Short Sales is that they are treated much like a Foreclosure. In fact, Short Sales have very specific concerns that you will need to address with an Attorney and or CPA before you decide to do one. Let me share some of those now.
1. The lender can sue you and obtain a judgment against you for the difference in the amount paid off and amount owed. For example, if you sold your home 30,000.00 short, the bank can go to court and obtain a judgment. This judgment against you typically opens all your assets, boats, cars, homes, jewelry, checking and saving accounts, etcâ€¦. to be pursued by the debt collectors. For further details on what these judgment can do to you, you should speak with an Attorney in your state.
2. You may hear from some people that if the back decides to write off the difference then that 30,000.00 (in my example) would be considered income and you would be sent a 1099 Tax Form because, as income you owe taxes on it. This isnâ€™t always true as of The Mortgage Forgiveness Debt Relief Act of 2007. Obviously, for further details on this Act and the implications it may have on your specific situation, you will want to speak with a CPA or Attorney.
3. The credit report takes a hard hit. 2 years for recovery isnâ€™t always the case and here is why. Yes, you will take a huge hit on your FICO, typically 350+ point drop. So, if your credit was 800 (really good) and you take a 350 hit, that drops you to 450 which is really bad, really bad! The other thing to remember is that your credit report obtains a public record and it will be recorded for all to see (especially future lenders) that you were not able to pay back a mortgage and in fact, you completed a â€œShort Saleâ€.
For many people Short Sales are the only alternative however, I highly, strongly, fanatically implore you, talk to your lender and do all you can to work it out! It just isnâ€™t worth it, if you can avoid it.