Short Sale: Is it a preferable option for the homeowners?
Before opting for a short sale make sure whether short sale is a preferable option for you. Therefore, continue reading the article in order to get more information on it.
What is short sale?
A short sale is a sale of a property in which the proceeds of the sale are less than the balance of debts secured by liens against the property. When the property owner can’t afford to repay the liens’ amount completely, the lien holder may agree to release the lien on the property by accepting less than the amount owed on the debt. The remaining balance that is unpaid is called deficiency.
What is the effect of short sale on credit report?
If you have planned to choose short sale in order to save your credit score from dropping, then it is a wrong option. However, the effect of short sale may not be as severe as foreclosure on your credit report.
Short sales, foreclosures, and deeds-in-lieu of foreclosure are considered to be as “not paid as agreed” accounts; therefore they may similarly affect your credit score, according to FICO.
Are you required to pay the deficiency in a short sale?
When you opt for a short sale the remaining balance that is unpaid may not be cancelled automatically on your mortgage. The lenders approval is required before you opt for a short sale. Therefore, the lender may release the lien on the property when he approves the short sale proposal. You may not be able to sell the property unless the lien on the property is released.
When you opt for a short sale, the remaining unpaid balance may not be cancelled. Some lenders before approving the short sale may compel you to sign a new promissory note or some lenders may reserve the right to collect the deficiency.
Therefore, after the short sale closes the lenders may sell the remaining debt to a collection agency. If you want to avoid creditor harassment, then you can negotiate with the creditors in writing to cancel the remaining debt on the mortgage.
Is the deficiency treated as taxable income?
If the lender forgives remaining balance after the short sale, then the deficiency can be treated as taxable income. According to the federal Mortgage Forgiveness Debt Relief Act of 2007, you can manage to save the deficiency income from being taxed, only under following circumstances:
1. The remaining balance forgiven is used to buy, build or used for refurbishing your home or to refinance debt incurred for those purposes.
2. Debts forgiven between 2007 and 2012.
3. If the discharge is on the basis of a decline in your home’s value or your financial condition.
Therefore, if you opt for short sale you may face various problems but it’s always a better option than foreclosure on the property. Make sure you find a reliable short sale specialists to complete the process with ease.