For whatever reason, your household is struggling financially. It came down to a choice between keeping food on the table and paying the mortgage and the mortgage lost. Now, you’re facing foreclosure.
You know that if your lender is willing, you can sell the house in a short sale for less than what you owe and keep a foreclosure off your credit record.
Is this really a better option? Maybe.
There are definite downsides to short sales
Both lenders and sellers alike can struggle with the constraints of a short sale. A short sale is usually anything but quick, and a lot of buyers are turned off by the idea of negotiation with a third party (the seller’s bank) over the deal. Plus, there may be problems finding a buyer who is willing to take your home “as-is.”
But sellers who are already in financial distress need to think twice before pivoting to this option. A short sale could leave them in a worse position than a foreclosure due to:
- Tax consequences: If your lender forgives the difference between your mortgage and the price of the short sale, you may end up having to declare that cancelled debt as income on your taxes. That can be hard to handle when you already can’t afford your bills.
- Deficiency judgments: Even worse, you could still end up with a “deficiency.” When this happens, the lender takes what they can get from the short sale and then gets a judgment against you for the rest. That’s a bill many distressed homeowners don’t expect.
- Damaged credit: A short sale isn’t a foreclosure, but it does have a seriously negative effect on your credit score, just the same. That’s hardly worth the trouble, especially when you may end up owing taxes or facing a deficiency judgment, too.
What option do you have?
Well, foreclosure isn’t necessarily your only choice. You may be able to fight off foreclosure through a loan modification that will give you a break and help you regain solid financial footing.
When facing foreclosure, don’t guess about your next step
This isn’t a situation that happens all the time, so it’s okay if you aren’t sure how to proceed after the foreclosure notice comes. Talking to an attorney right away is usually the best way to preserve your options for the future.