Making the decision to short sell your home is not, and never should be, an easy one to make. There are instances, though, when you may have no other choice. While the housing market is trying to make a comeback, it is still being hampered by a number of factors that are holding down home values and preventing owners from selling to break even or even obtaining a home equity loan to cover expenses such as installing a new roof or repairing a cracked driveway. The slightly improving market currently is being held back by the high number of foreclosures that buyers can purchase for literally pennies on the dollar, not to mention the fact that it still is a buyer’s market, when practically any price they see fit to offer is one that may need to be considered, even if it’s half the real value of the home and property.
Short selling is not an easy or quick solution for the current housing problem, and it should not be considered lightly. While it is a better option than foreclosing, it still has some significant drawbacks that can hinder not only your future ability to purchase a home, but your ability to find a job, as well.
The process of a short sale works differently depending upon who your mortgage is held by, but you won’t be getting off scott-free regardless of who your mortgage is held by. There are some cases in which the bank can go after you for what is called a “deficiency judgement,” which basically means that they have the ability to sue you for the balance of the home’s value after a sale. Let’s say for instance you have a $200,000 home that short sells for $100,000. In certain circumstances, the bank can then send you a bill for $100,000 in order to cover their losses. Suddenly, short selling doesn’t sound so cool, does it?
Another issue that short sellers have to contend with is that of income tax. But you say, what does income tax have to do with short selling? This is common in cases where the bank absolves the homeowner of any remaining amount of mortgage loan after the sale. Rather than considering it a wash, the IRS sees this forgiven loan amount as a form of income - even though you aren’t able to live in the house any more, and have taken no physical benefit from the loan forgiveness. The IRS just doesn’t care.
Really, once you’ve signed up for the mortgage, there just isn’t any real way out, regardless of whether the neighborhood is going under quickly, you’re losing your job, or you’re just plain broke. You’ll pay the price somehow, whether it be a major hit on your credit that could cost you big in higher interest rates and possibly even a job down the road, or a big bill from the tax man.
So, is there an alternative? Possibly. Under the right circumstances, you could still see your current home as an investment opportunity, even if it’s a somewhat unconventional solution. Have you thought about trying to rent it out? It may be possible to contract with an property management company to have the house taken care of if you need to move out of town, or you may be able to rent out your home and take an apartment elsewhere until your finances straighten out. The point is, you always have options, and if you avoid listening to those who would take advantage of you and your family, you’ll find that those options aren’t so drastically difficult as you might think!