Many people do not understand what a short sale is or the process or the implications on a person’s credit and/or taxes following a short sale. Below, I put together a few short sale questions and answers to help in understanding.
1. What is a Short Sale?
A short sale is when a seller of a property owes more to their bank/mortgage holder than the home is worth, and the seller needs to sell the property because of a distressed situation. If the bank agrees to let the seller “short sale”, the bank is “shorted” the amount of the difference between what is owed and what gets paid back to them.
2. Will short selling a home affect a seller’s credit?
YES. It WILL affect a seller’s credit, as much as 200 points. Most banks also state that it will be between 3-5 years after the short sale happens before they would consider giving a loan to an individual who has a short sale on their credit report, if there are not any other blemishes on their credit report after that point.
3. What are the other implications of a Short Sale for a seller?
There are a number.
First, the difference between what the bank is owed and what the bank receives as repayment of the loan is most likely considered TAXABLE INCOME by the government. For example, if a seller has a mortgage for $200,000, and the mortgage company clears $160,000, that $40,000 is considered INCOME that seller must show on their taxes, and therefore pay income tax on that amount.
Also, depending on the situation, the bank may still require the seller to pay the rest or some of the difference back over time.
Thanks to about.com for a few of the details to share.
With the new HAFA program that has been in place since April 5, hopefully many distressed homeowners will be able to be assisted much easier.
Please contact me for more information on Baltimore short sale questions.