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What Is Selling Short?

 

If you bought your home in 2007 or just prior, then there is a good chance that your home ownership situation was significantly affected by the Great Recession of 2008. During that time, foreclosures were on the rise and people could not afford to pay the mortgages on their over-valuated homes. People who remained homeowners after 2008 soon found their mortgage to be higher than the value of their home. That is called having your mortgage under water, and it could be fixed by a short sale.

What Is A Short Sale?

A short sale is when your lender allows you to sell your home at a price that does not completely pay off your mortgage. The lender obviously gets all of the proceeds of the sale, forgives the difference between the sale price and the mortgage balance, and you are able to walk away from your mortgage. It sounds like a great deal, but it does have consequences.

Lenders Are Not Always Agreeable

A short sale is great for a troubled homeowner, but the lender has to be prepared to lose a lot of money to allow the short sale to go through. Some lenders have hard “no short sales” policies, while others tend to be hesitant to approve such a measure.

What About Your Credit?

A short sale is not going to have as much of a negative effect on your credit as a foreclosure, but it will be a negative event on your credit report. As with any other type of credit rating event, the magnitude to which a short sale affects your credit score varies from consumer to consumer. Even though you will be getting out of a bad mortgage, the process itself is going to negatively impact your credit.

Can I Get Another Mortgage?

It might take two or three years, but some short sale recipients have been known to qualify for FHA sponsored mortgages or other government mortgage programs. Once again, this depends on the individual consumer and their credit history with their other accounts. But getting a short sale approved does not necessarily mean you will never have another mortgage in your name.

What About Tax Implications?

Any time you have a situation where you are able to settle a debt for less than the actual amount, you are looking at creating taxable income. The IRS will consider the difference between your original mortgage balance and your short sale amount to be income, and it will fall under some kind of tax. You will need to consult with an accountant to get a more accurate idea as to how much tax you will have to pay.

If your mortgage is suddenly more than the value of your home, then your mortgage is considered to be under water and is a financial liability. If you are unable to refinance the home and find yourself getting behind in your payments, then a short sale would be a better option that foreclosure. Talk to your lender about a short sale and see if it might be the solution to your problem.

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