...That's the question that seems to be on everyone's mind these days. But before we answer that question, let's look at what is a short sale.
A short sale is when a homeowner owes more on a home than the home is worth and they want the lender to accept a reduced payoff on the loan upon the home selling. They must list their property at ‘market value', subject to third party approval ... The lender. Once there is an offer, it must be sent to the lender's loss mitigation department for approval. This approval process can take weeks or even months. If the lender approves the transaction, they will either accept the proceeds of the sale and forgive the amount of the shortage, or they will seek a judgment against the homeowner/seller for the amount of the shortage. Let's assume they forgive the balance (which is the desire of a homeowner when they do a short sale), they will send the homeowner a 1099 for the amount of the debt that was forgiven. This creates a tax liability for the seller. Let's assume the amount of the debt being forgiven is $40,000 and also assume the seller is at a 25% tax rate. That would create an additional $40,000 in reported income and additional taxes of approximately $10,000 for the seller ... Something to think about (please consult a tax professional before determining the extent of your tax liability). Of course this is better than the alternative of the lender seeking a $40,000 judgment for the amount of the shortage.
Before approving a short sale, the lender will want to see evidence of financial hardship making continuing paying the loan not an option. They will look at the sellers' income and assets to determine eligibility. If the lender determines that the seller can afford to continue paying their loan and has no reason to sell, they are unlikely to approve a short sale.
A short sale is generally a good option for those who cannot afford to keep up on their loan payments, are in default, and for whom foreclosure is inevitable. A short sale will have negative impact on the seller's credit, but not nearly as negative as a foreclosure or bankruptcy.
A short sale is generally not a good idea for someone who can afford their payments and has no reason to move other than they just don't like being upside-down in their property and they want out. Someone in that situation probably wouldn't be approved by their lender do a short sale and are better offer keeping their loan current and riding out the down market before selling the home.
If you are considering a short sale and have questions, please don't hesitate to contact me... It is a complicated transaction with serious consequences...
Make it a great day!