What Is the Negative Side to a Short Sell?
If you're upside down on your mortgage, meaning that you owe more than the house is worth, and cannot make your payments or need to move out of your home, a short sale is one way to avoid foreclosure. In a short sale, your lender agrees to let you sell your house for less than you owe, and the buyer gets the house without any responsibility for your loan. While a short sale can get you out of an undesirable financial situation, it comes with serious drawbacks.
Ongoing Maintenance Responsibility
A short sale can prolong the amount of time that you're responsible for your house. While you wait for a buyer to choose your house and close on the process, you may still be on the hook for many of the accountabilities that come with being the current home owner. You will likely need to keep up your insurance, pay homeowner's association dues, property taxes and utilities in order to avoid collections. If a system in the house breaks or if it's vacant and gets vandalized, you'll have to cover the cost to take care of it, at least until you can find a buyer that will take the house in "as-is" condition. While this might not be an imposition if you're living in the house, it could be if you've moved away.
Extended Selling Time
Short-selling your house can make it take longer to sell. Typically, the short-sale process can involve a longer-than-usual review process once the buyer and you agree on an offer. The lender will review the offer and decide whether or not to accept it and allow the short sale. These delays can take weeks or months, during which the buyer and you wait. Knowing this, some buyers steer away from short sales, meaning that you'll have fewer people looking at your property, potentially making it take longer to find an interested buyer.
Risk of Damaged Credit
While a short sale lets you avoid having a foreclosure on your credit report, it'll still show up when you have your credit report checked. Short sales will have an impact on your credit score and can make it harder for you to get another mortgage in the future. In addition, late payments leading up to your short sale can impact your score. Every situation is different, so the impact varies from home owner to home owner. Be sure to carefully consider your options to ensure you understand the impact a short sale can have.
Potential Long-Term Costs
When all is said and done with a short sale, you could still end up owing money. Just because your lender agrees to release their claim on the home in a short sale doesn't necessarily mean they're letting you off the hook on your deficiency. According to Forbes, a lender can still issue a deficiency judgment in many cases. Depending on your state's laws, if you don't get signed documents from your lender stating that it won't pursue you for the shortfall; it may try to collect it from you. Furthermore, when your debt is forgiven, the Internal Revenue Service may tax you on the value of the forgiveness.
While there are exceptions in place that protect many home sellers who short-sell their home, it's best to check with the IRS or with a CPA to see how a short sale could impact your taxes, credit and financial situation before you pursue a short sale strategy.
About the Author
Solomon Poretsky has been a writer since 1996, with experience in the fields of financial services, real estate and technology. Poretsky holds a Bachelor of Arts in political science from Columbia University.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.