A short sale is something that could help you sell your home and get out of debt. It could help you erase debt beyond what you can sell your home for and give you an opportunity to start over. However, there are some negatives that you need to consider.
Short sales take time, and they damage your credit badly. You could end up owing thousands of dollars in taxes for any short sale you complete, too. So, is it the right choice? Here are the negatives to consider.
1. When you sell your home, you could owe taxes
Consider it this way: When you sell your home, you’re actually getting a discount from the lender. It’s like you’re getting paid by the lender to sell your home at a lower price. The lender takes care of the remaining debt, and that money is treated like an income.
In some cases, you could end up owing income taxes on the difference between the sale price of your home and what you owed. That’s why it’s a better idea to discharge your mortgage through a bankruptcy, where taxes aren’t a concern. The Mortgage Debt Relief Act of 2007 may help you avoid taxation, but you should consult with your attorney before making a decision to enter into a short sale.
2. Your credit suffers a blow
There’s no question that your credit suffers when you go through a short sale. Lenders report that you did not pay the mortgage as agreed, even though the account is closed out. The short sale may drop your credit rating as much as a foreclosure, but it doesn’t look quite as bad as a foreclosure would.
3. Short sales take time
Even if you haven’t missed payments yet, the time it takes to go through a short sale could mean you start missing payments and hurt your credit even more than in the past. It’s often possible to buy a new home soon if you can show a history of on-time payments leading up to a short sale, but due to the time it takes to complete a sale, that might not be a possibility for you.
The long delay may also mean your buyer moves on without staying interested in your home, leaving you in the same position you were in before he or she showed interest in your property.
Short sales have many negatives, so it’s wise to consider how they could impact you. Choosing the right way to eliminate your mortgage will make a difference in your finances now and in the future.