The Dangers Of Short Selling Your Home Are Enormous And Long Lasting

by Hank Coleman

The risks of short selling your houseSelling your home with a short sale, which is selling it for less than you owe on your mortgage, not only takes a lot of time and energy, but it also as a lot of long lasting consequences as well. There are many things that you should consider before going the route of selling your home for less than you owe on your mortgage. Here are a few reason why short selling may not be a great idea for you.

Short Selling Your Home Nukes Your Credit Score

The only thing worse you can do to your credit score with respect to your home is having it foreclosed on. Selling your home with a short sale is almost as bad in the eyes of your creditors and future creditors as having been foreclosed. So, if you will need to borrow new debt in the next seven years, you may want to look at other options for your home such as becoming a landlord.

Making Your Payments May Hurt You

Your bank may not even consider you for a short sale if you have been making your mortgage payments on time over the course of the past year. A short sale requires the bank to take a hair cut on the loan they wrote. Why would they take a loss in revenue if you are making your payments and doing what you are supposed to be doing based on the contract you signed?

You May Not Qualify If You Have Cash

One thing that many people may not realize is that banks do not have to accept a short sale. They do not have to accept a lower payment for your home than what you owe them. If you have an emergency fund or substantial cash reserve because you are struggling, they will most likely want you to use that money to pay them the difference that you owe them on your home mortgage.

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Forgiving Debt Will Count As Income

If your bank actually waives a portion of your mortgage balance, then the IRS will consider that income that you received. And, it will have to be included in your income tax return next year. This can have serious repercussions if the amount of your short sale and your mortgage balance differ quite a bit. For example, if you short sale a home for $200,000 when you still owe $250,000 on your mortgage, you would owe taxes on the $50,000 forgiveness that you received. If you are in the 25% tax bracket, you would owe $12,500 in federal income taxes this April. That could be a big hit for many American families if you were not ready for it. You could find yourself right back in financial trouble again possibly.

Your Bank May Sue You For The Difference

You bank may come after you in court for the difference that you owe them. You will need to get it in writing that they will completely forgive the difference between what you owe them on your mortgage and what you receive in proceeds from your short sale. If you don’t do that, they can sue you late for the difference. A short sale can be the “wonderful” experience that keeps on costing you for years to come.

Everyone’s situation is different of course, and I recognize that. You may find yourself painted in a corner. There may be no other option or very few even more unpleasant options for you than a short sell. But, you need to understand what you are getting into for the long time. Short selling your home has long lasting and potentially very expensive consequences.


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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 577 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 3 comments… read them below or add one }

Sean @ One Smart Dollar

There are a couple of units in our condo building in Chicago that have done a short sale and it kills the price comparisons for everyone else. We were trying to sell out place for a year before we ended up renting it.

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Hank Coleman

That’s a great point. I wasn’t even thinking about how your short sale can affect your neighbors as well. It doesn’t just apply to condo buildings as well. You can see the same thing in entire neighborhoods too.

Reply

John S @ Frugal Rules

Great point on the debt forgiveness counting as income. That will make an already painful situation that much worse. I know that being in this situation may cause the person to just want to act to get out from under it, but you’re right in that acting rashly can cause long reaching effects.

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