A Short Sale of real estate
happens when the owner of the home or property owes more on the
property than what it sells for. This can happen when a
home owner chooses to sell when the property values have dropped
drastically or when an owner has taken out equity loans on top
of the mortgage loan and the loans equal more than the value of
the home. A Short Sale can also occur when a homeowner is
forced into foreclosure and the bank sells the house for less
than the amount still owed. In any case, when all is said
and done, the owner comes out owing more money instead of
earning a profit after the sale of the property.
The Credit implications for a
Short Sale are very different for those voluntary selling their
property and for those forced into foreclosure. If the
property owner voluntarily selling the property can pay off the
amount owed out of pocket by using assets already owned there
should be no credit implications. If the property owner
needs to take a new loan from a bank in order to make up the
difference from the short sale, then the credit implications
would be the same as the credit implications of taking out any
loan. In Fact, sometimes taking out a loan can improve a
credit rating. Whether the new loan raises a credit score
or lowers a credit score, most likely the new credit score will
not be drastically different than the property owner's credit
score before the short sale.
However, if the short sale is
due to foreclosure, the property owner's credit could be
negatively and severely affected. Here is why.
Example, the homeowner owes $100,000 on the foreclosed property,
but the lender only gets $70,000 from the sale. The lender
can then sue the homeowner for the $30,000 difference.
But, the homeowner won't have the $30,000. If he did, he most
likely wouldn't have gone into foreclosure in the first place.
If the lender chooses to sue, and the homeowner cannot pay, a
deficiency judgment would appear on the homeowner's credit
report, negatively affecting the homeowner's credit.
Often, the bank chooses not to
sue, but to take the loss as a tax write-off. In this
case, there will be no deficiency judgment on the homeowner's
credit report; however, there is another implication. The
$30,000 that the homeowner did not have to pay would be
considered by the IRS to be income. The lender will send a
1099 to the homeowner at the end of the year, and the homeowner
will be required to pay taxes on that $30,000. Even when
the bank chooses not to sue, the foreclosure can end up showing
in credit checks because it is public record.
It is strongly recommended to
consult a real estate attorney prior to making any decisions
pertaining to this type of home sale.
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