Things to Watch Out For When Short Selling Your Home


While Short Selling your home isn't a desirable situation, it offers a strong solution for responsibly handling mortgage debt, as well as a viable alternative to foreclosure. Short Sales, however, are not without consequences. You should be aware of some of the issues associated with Short Sales.
Deficiency Judgments
Let's say the amount owed on your property is $360,000 and the Short Sale netted $320,000 to the lender. This means that in theory, you still owe $40,000 to the lender. This amount is known as the "deficiency."
The lender may waive this deficiency so you won't be personally liable to the lender for this unpaid amount. However, if a lender is unwilling to waive their right to a deficiency judgment, they can claim a personal judgment against you for the unpaid amount (in our example, $40,000).
If the judgment is granted the lender then becomes a regular, unsecured creditor, and has all the remedies other unsecured creditors have, such as wage garnishment.
Before proceeding with a Short Sale, you should clearly understand your options and seek legal advice from an attorney as to, whether or not your Short Sale eliminates the mortgage debt obligation in full, or whether the lender will try to collect the deficiency. ZipRealty Agents cannot provide legal advice.
Taxable Income
If the lender does agree to waive their rights to a Deficiency Judgment, you are now free and clear of the mortgage debt.
However, in some states, a cancelled debt (in the example above, $40,000) may be treated as taxable income.
Subject to certain limitations, The Mortgage Debt Relief Act of 2007, in effect through 2012, allows taxpayers to exclude income from the discharge of debt on their principal residence if the debt relief was related to home value decline and the taxpayer's financial condition. The amount of debt forgiven is capped at $1 million for single persons and $2 million for married persons.
Before proceeding with a Short Sale, you should consult your tax advisor to understand your personal tax liability should you engage in a Short Sale. I cannot provide tax advice.
Credit Impact
While a Short Sale is generally less damaging to your credit history than a foreclosure, it will impact your credit rating. A short sale will generally be reported as a debt that has been settled for less than full balance.
Foreclosure Proceedings
A short sale will NOT automatically halt any foreclosure proceedings, so you should be in contact with the lender's foreclosure administrators (usually the loss mitigation department) to be fully aware of:
  • The lender's timeline for foreclosure.
  • Whether or not the lender will halt or delay foreclosure proceedings while you are attempting to Short Sell the home.
Of course, the surest way to avoid foreclosure is to sell the home before the date of sale under foreclosure proceedings. HAFA may also help with this process.
Delays, Delays, Delays
Given the number of parties involved, and the increasing number of foreclosures and Short Sales (creating a backlog of paperwork at lenders), it's no surprise that the process can be a long one with many delays.