A foreclosure becomes a real possibility if you fall too far behind on your mortgage payments. If your home’s value has depreciated to the point that it is less than what you still owe on the home, a short sale may be an option.
While effective at preventing foreclosure, a short sale can present its own challenges. While it is appropriate to consider all available options, a short sale may not be the most financially desirable choice.
How does a short sale work?
A short sale involves selling the home for less than what you owe on it. In other words, the sale price comes up short and is not enough to cover your mortgage. Therefore, your mortgage lender has a say in the negotiations. The goal is for the lender to agree to a compromise that allows the short sale to go through.
What are the challenges involved in short sales?
Negotiations over short sales can take a long time. Your mortgage lender has to approve an offer before you can accept it. If the offer is too low, according to an appraisal that the lender obtains independently, rejection is more likely.
The difference between the home’s value and the mortgage amount that you still owe is the deficiency, which remains your responsibility. A compromise with your lender may involve forgiving the deficiency, meaning that you would no longer be responsible for paying it back. However, if this occurs, the government can tax you for the amount of your forgiven debt. Depending on how much you originally owed, you could have to pay thousands of dollars in taxes.