The concept of a short sale is simple. A “short sale” occurs when the sales price of a property isn’t enough to pay off the mortgage. The sales price is “short” of the amount needed to fully pay off the mortgage. If the bank agrees to a “short sale” then the property is sold for less than the amount due on the mortgage and the bank receives less than the amount that is owed. When the Bank receives less than the amount owed, the property is sold “short” of the amount due, and this is known as a “short sale.”
The concept of a “short sale” is simple. But the decision whether or not to short sell a property can be quite complex. Each potential short sale situation is unique, and the decision to short sell must be carefully made and evaluated for each borrower.
There are many considerations involved in deciding whether or not a property should be short sold. Three important considerations involve potential lender liability, tax issues, and credit concerns.
When a property is short sold, the bank won’t receive the full amount due on the loan. In some situations, the bank forgives the unpaid balance with the result that the borrower won’t be personally liable to the bank for any unpaid amount. In other situations, the bank may retain a claim against the borrower for the unpaid amount, and in these situations the borrower may be personally liable for the “short” amount. In still other situations, the bank may neither expressly forgive the debt nor retain a claim against the borrower. In these situations, the borrower may still be liable to the bank for the unpaid amount after the short sale.
A short sale can involve significant tax considerations. Some of these tax considerations can be quite complex. The amount of time a borrower has lived in a property can have important tax consequences in a short sale situation. Sometimes a short sale can result in a significant tax liability, and sometimes a borrower can avoid these taxes by moving back into the property for a period of time. Many borrowers have refinanced their homes. Sometimes these borrowers have taken equity out of their property in connection with their refinance. In some situations these equity withdrawals can create a significant tax liability following a short sale.
A foreclosure will almost always result in negative credit reporting on a borrower’s credit report. But in many cases the negative credit effects from a short sale will be less than the credit damage from a foreclosure. Whether or not credit is important can vary between borrowers. The likely negative credit effect of foreclosure versus short sale must be evaluated for each borrower depending on their specific circumstances.
There is no single correct answer as to whether or not a short sale is the best answer for any specific borrower. Each borrower’s specific situation must be separately evaluated. Borrowers would do well to seek competent, professional tax and legal advice in connection with any anticipated short sale.