I attended a luncheon recently where the speaker spoke about the “Big 3” when referring to short sales. These are the 3 most common concerns for sellers when considering whether or not to do a short sale. If you are considering a short sale call an experience REALTOR today.
#1 – Deficiency Waiver
Getting the bank to release you from your obligation and waiving their right to pursue you in the future for the deficiency or short fall between what you owe and the proceeds they will receive from the short sale. Getting the bank to agree to this waiver is the primary goal in a short sale. Over the past couple years I have been able to negotiate this for my sellers 100% of the time. Often times this waiver is conditioned upon a the seller making a cash contribution at closing.
#2 Tax Liability
When a mortgage holder “forgives” debt they send a 1099 to the borrower. When you do a short sale you will receive a 1099 from your bank in the amount of the debt that was forgiven. This is taxable as ordinary income. It is vital that you consult your tax preparer or a CPA to determine what this means for your individual tax situation. There is a Mortgage Debt Forgiveness Act in place through December 31, 2012 that allows for some homeowners to be exempt.
#3 Credit Implications
The third largest concern for sellers contemplating a short sale is the effect it will have on their credit. Here is a chart from FICO that shows the impact of various short sale related events on several different credit scores. As you can see foreclosure and bankruptcy are far more impactful to credit scores than a short sale.