If you have been thinking that it might be a good idea to sell your home in pre-foreclosure, it is a good way to avoid foreclosure. However, there are some short sale drawbacks that you should know.
A short sale is a type of sale in which your lender agrees to accept less than the principal amount you owe on your home loan. Typically, this will allow you and the lender to avoid the negative consequences and expenses that accompany foreclosure. Short sales are usually only accepted by the lender if you home value has dropped drastically since the mortgage was initially underwritten.
Among the short sale drawbacks, one is that a short sale does negatively affect your credit history. However, a short sale is less damaging to your credit than a foreclosure. Short selling your home can also mean that you are left owing a balance on the home. You need to ask your lender for a written waiver of the debt that remains after the sale. If your lender asks you to sign a promissory note for the difference in what the home sell for and what you owe, talk to a housing counselor with the Home Affordable Foreclosure Alternatives (HAFA) Program. You can sell your home in a short sale through HAFA and your lender must forgive the balance between your sale and your mortgage debt.
Tax consequences are one of the biggest potential drawbacks that you need to investigate before doing a short sale. You may end up owing a tax bill on the "shorted" part of the sale. For example, if you owe $300,000 on your home, but your lender agrees to accept $180,000 for it, you may taxed on $120,000 in income. The Mortgage Forgiveness Debt Relief Act and Debt Cancellation was created to waive this taxable income, so you want to discuss your short sale with a tax attorney before you do sell.
Finally, it is also worth noting that your lender may be extremely slow to approve short sales and it may also refuse offers. This means that you may go through a lot of work to try to short sale the home and then not sell.
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