Someone who is struggling with their mortgage may think that a short sale is the answer to their expensive housing problems. Most often, that person is gradually draining his savings account just to stay current with the mortgage and he has come to the conclusion that he cannot afford the house anymore. However, a short sale is most likely not the answer to the problem.
Q: First, what is a short sale?
A: It is a sale of a property for less than what is owed on the mortgage loan balance.
Q: Why should I not short sell my house?
A: First, you may not need to, because you may still be able to save it. The first option should be a loan modification. Even if you are denied a loan modification under the government programs, you could still keep the home through a different type of modification. I have had cases where a homeowner has been denied four different times for a modification, but ultimately qualified for a modification and kept his home. So, do not give up.
Q: Are there any other reasons why I should not short sale my house?
A: There are huge tax ramifications to a short sale.
Q: What are those?
A: Since you to not have to pay back the entire loan amount, it is looked at as a benefit to you. The IRS looks at that benefit as income to you. This means that you have to pay tax on the difference between what you owed and what you short sell your house for. That could amount to an enormous tax bill.
Q: Can you give me an example?
A: Let’s say you owe $300,000 on your house, but it is worth only $200,000, which is the price you short sell it for. You did not have to pay back that $100,000 balance. So, you have to pay tax on $100,000 to the IRS. That amounts to $35,000. Unless you can make such a large payment to the IRS, then you should not consider a short sale.
Q: Are there other negatives to a short sale?
A: You may have to come up with money at the closing. In the past this was not a requirement. However, now the lenders are looking for ways to cut their losses, so they are asking for a homeowner who short sells their property to bring money to effectuate the closing. This could mean that the seller could have to come up with several thousand dollars at the closing or else the closing does not go through.
Q: Are there other reasons why I should not short sell my house?
A: Yes, there are so many requirements to a short sale that it can literally make a homeowner (and a buyer) throw up his hands and walk away. The lenders are bureaucratic nightmares when it comes to a short sale. Their requirements can leave your head spinning. To satisfy all of these requirements takes an extremely long time, which you may not have.
Q: Will a short sale stop a foreclosure?
A: No, it will not. If you are attempting to short sell your house, it is probably because you missed at least one mortgage payment and have made the decision you cannot afford to live there any longer. When you miss even one mortgage payment, then the bank can begin foreclosure proceedings against you.
Q: Why will a short sale not stop a foreclosure?
A: The banks know that a short sale may not occur for a variety of reasons so they are covering themselves by starting the foreclosure process. So, if the short sale fails, then the bank can snatch the house through foreclosure. Also, the bank’s attorneys get paid when they get a judgment of foreclosure against you. Since they want to get paid, they will push hard to get that judgment entered even though you may be in the middle of a short sale.
Q: If I have reached the decision to leave my house, is there an alternative to a short sale?
A: Yes. The best thing you can do is to get informed about your options. In order to do so, consult with an attorney who is experienced in handling these types of matters. You are dealing with the biggest asset of your life, and you should treat this matter seriously by learning all of your options so that you can make an educated decision regarding what your next step should be.