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3 Things You Should Know About Short Sales

Posted Wednesday, July 22, 2015

Are you finding it hard to pay your mortgage? A short sale may be the solution to your financial woes. A short sale is a sale of property at a price lower than the amount owed on the mortgage. Here are a few facts you need to know before you decide on a short sale.

1. You Cannot Save Your Credit Score with a Short Sale

Most people opt for a short sale to prevent their home from going through a foreclosure sale. The truth of the matter is that a short sale, like a foreclosure, is not good for your credit score. In fact, foreclosures and short sales are considered “not paid as agreed” accounts; therefore, they both have a negative effect on your credit score.

2. A Short Sale Will Not Cancel Your Remaining Mortgage Debt

A short sale will not automatically cancel your mortgage debt. A mortgage contract has two parts: the part where you commit to paying the lender and the part where you provide security for the loan. When the lender approves a short sale, he or she agrees to remove the lien that is on the property; you cannot short sell property without the removal of the lien. When the short sale closes, the lender has the right to demand the balance of your mortgage debt unless he or she agrees to forgive your debt.

3. Taxes on Mortgage Debt

If your lender decides to cancel your debt following a short sale, this is no reason to rejoice, you may still owe taxes on the amount of your forgiven debt. This is because IRS still considers forgiven debts as income. According to the Mortgage Forgiveness Debt Relief Act (2007), you can only exclude all or part of a forgiven debt from your income if the following conditions are met:

  • You used the forgiven debt to build, buy or improve your home
  • Your debt was forgiven between the years of 2007 and 2013
  • Your debt was forgiven because the value of your home declined

Short sales are time-consuming, and you are not guaranteed of succeeding in the end. Before you short sell property, you need to discuss with your lender about other foreclosure options like modifying your loan, refinancing your mortgage or negotiating the conditions of a deed-in-lieu of foreclosure. All of these alternatives have their setbacks and benefits; therefore, you should compare them before making a choice.