As a strategy to avoid foreclosure, and the negatives associated with one, a short sale can be a good option for some homeowners. Other than having to move out at the end of the sale, homeowner struggling with mortgage debt are able to find resolution with few negatives. However, there are some things to consider before putting your home up for a short sale.
One thing your lender might not have mentioned are the tax consequences that can come with a short sale. In some situations, a homeowner may be liable for paying taxes on the any portion of their mortgage debt that is forgiven by the lender. For example, if the home is sold for $50,000 less than what is owed on the mortgage and the lender waives the liability for repayment on behalf of the homeowner, this amount may be required to be reported as “income” to the IRS. This is not the case in all short sales, but should be discussed prior to initiating the process.
While a short sale can save additional credit damage by avoiding foreclosure, homeowners should be aware that their credit is likely to have already suffered damage when mortgage payments are missed or the account becomes delinquent. Depending on how long the foreclosure process has been active prior to stopping before a short sale, the homeowner may find it takes a while to reverse the damaging effects of the once active foreclosure. Further, future lenders may be hesitant to lend to a homeowner even after a short sale was completed in lieu of a foreclosure. The short of it is simply that even a short sale can make future mortgages more challenging to obtain.