Why Short Sales Usually Are a Bad Idea

Admin December-4-2009 No Comments »

Many of my clients tell me that they want to do a short sale. A short sale is where the mortgage lender agrees to accept less than the full amount due to release the mortgage lien and allow the sale to occur. If you can’t afford your mortgage, this sounds like a pretty good idea. But it might not be.

Why not?1. A short sale benefits many people other than you. A short sale benefits the mortgage lender, the realtor and the purchaser of the property greatly. The mortgage lender doesn’t have to foreclose (and pay for the foreclosure), the realtor gets a commission from the sale, and the purchaser gets the property cheap. But what’s in it for you, other than (possibly–see below) getting out of having to pay the the mortgage?

2. A short sale hurts your credit. A short sale causes the same harm to your credit as a foreclosure or a bankruptcy.

3. You may owe taxes as the result of a short sale You will receive a 1099-C as the result of a short sale on the difference between what you owe and what the mortgage lender agrees to accept. This amount is considered income, and you need to pay taxes on it. There are some exceptions to this general rule, such as insolvency and certain types of mortgage debt, so check with your tax adviser first.

4. The debt might not be forgiven. A number of my clients have reported that, although the lender agrees to release the lien, so that the property can be sold, their personal obligation is not released. In other words, the lender isn’t accepting the short sale amount as payment in full. This is particularly true of second mortgages.

When might a short sale make sense? If you are able to make a go of it financially if the mortgage is released, even with the payment of taxes, and have little other debt.

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