What Are the Disadvantages of a Short-Sale Mortgage?
Short sales are the most important alternative to foreclosures for homeowners who can not afford their mortgage and do not qualify for financing modification or mortgage refinance. They’re a last-ditch resort to prevent the worst effects of a foreclosure. The catch is short sales have their fair share of unwanted consequences. Knowing exactly what these are can sometimes help you lower their effects. In a short sale, your property is sold for significantly less than what you owe it, or so the lender must also agree to market.
Unlike loan alterations, mortgage refinances and other steps to prevent foreclosure, you do not get to keep the home in a short sale. You have to market the property to pay the mortgage you can no longer afford.
A short sale does not provide for the entire mortgage balance you owe on a home, so your lender could demand you pay the gap by filing for a deficiency judgment. To prevent this, you need to make sure your lender won’t demand the gap before you market. It is crucial to get this in writing.
Junior Lien Holders
If you’ve got a secondary mortgage, home equity line of credit or another type of secured loan on your home, and your short sale does not provide for the balance, you will still owe the money. Government programs like Home Affordable Foreclosure Alternatives supply incentives for secondary mortgage lenders, also referred to as junior lien holders, to cancel the debt, although this does not always occur.
Your lender might agree to cancel your debt after a short sale, however the IRS viewpoints forgiven debt as taxable income. The larger the larger the tax bill, the debt. The fantastic news is that the Mortgage Debt Relief Act of 2007 allows taxpayers to exclude this income if the house with all the forgiven debt was their primary residence. Visit the IRS website to learn more on scenarios where cancellation of debt income isn’t taxable.
Credit score Damage
Your credit rating is a score lenders use to quantify your reliability as a borrower. Lenders report short sales and foreclosures as reports”not paid as agreed” to credit reporting bureaus. A short sale will fall your credit score just as much as a foreclosure would. The only difference is that a foreclosure appears worse on a credit report to employers, landlords and prospective creditors.
Short sales are painfully slow. Lenders have to approve a short sale before it is final. This usually means an offer from a purchaser must first be accepted by a lender’s loss mitigation department–the section that deals with foreclosures, loan modifications and short sales. This can take anything from a few days to 2 weeks, and after which your purchaser might no longer be interested.