A short sale allows you to sell your home for less than the amount owed on the mortgage, and the lender will accept the sale amount as payment of the mortgage in full. By agreeing to a short sale, your lender will not be able to obtain the deficiency amount from you. A deficiency amount is the difference between the amount owed on the mortgage and the proceeds from the sale of your home.
Although you no longer will be responsible for the mortgage payments, many lenders only agree to a short sale if you are behind in your payments. If you have a second mortgage, that lender must also agree to the short sale.
How will a short sale affect your credit?
A short sale may negatively affect your credit for 2 to 3 years and reduce your credit score between 50-300 points. Depending on your situation, this may include the damage done by failing to pay your monthly mortgage payments. If the lender has already begun foreclosure proceedings against you at the time of the short sale, your credit score can be lowered even more.
What are the tax implications of a short sale?
If your home is not your primary residence, you may have to pay taxes on the deficiency amount.
The Mortgage Forgiveness Debt Relief Act of 2007 addresses the issue of the tax implications of a short sale. Extended through 2013, the act eliminates federal taxes owed on the deficiency amount if:
- The loan is for your primary residence;
- The loan was used to purchase, build or improve the primary residence; and
- The loan is secured by your primary residence.
You also may avoid tax liabilities if:
- You are insolvent (have more debt than assets) at the time of the sale; and
- You filed for bankruptcy prior to the closing on your home.