If you owe more than your Tampa home is worth and are considering a “short sale”, here are 3 potential consequences to consider.
#1) Credit Score
Missing mortgage payments will lower your credit score. To date, I have not seen a lender accept a short sale on a loan that was in good standing (where all mortgage payments are up-to-date). Once a loan is in default, however, a lender’s “Loss Mitigation Department” swings into action and short sales become an option. I am not encouraging anyone to miss a payment; rather I am encouraging you to call the lender (more than once) to ask about their current policy on short sales. Missing mortgage payments impacts your credit score: the more payments you miss, the greater the impact. While a well-executed short sale might take 4-6 months to close, foreclosures are taking 12-18 months.
#2) Tax Liability
Consult your CPA for additional details, but the bottom line is: most homeowners will not owe tax on the forgiven amount. Prior to the Mortgage Forgiveness Debt Relief Act of 2007 (HR3648), homeowners of primary residences were subject to a “Phantom Tax” on a short sale or foreclosure whereby the amount forgiven would count as income to the homeowner. Since the passage of this retroactive law in December 2008, eligible homeowners still report the cancelled debt as income, but they also are granted exclusion to write off this income. The new write off only applies to forgiven debt on primary residences and cancelled debt up to $2,000,000. If you acquired a home equity line of credit (HELOC) after closing that was not used to improve the property, then forgiveness of that loan may be subject to tax. Again, check with your accountant.
#3) Deficiency Judgment
If a loan is not paid in full, a lender can ask the court for a “deficiency judgment” that allows the lender to collect the balance of funds owed. This is true for both foreclosures and short sales. In 100% of foreclosures in Florida, lenders are entitled pursue a deficiency judgment. In some short sales, the lender waives the right to a deficiency. In almost all cases, a short sale results in a lower possible deficiency. Since short sales usually result in a higher sale price and a lower loss to the bank, you will be exposed to a lower potential deficiency.
For more information on the benefits and consequences of short sales, call Team Bohannon today. Doug Bohannon and Dale Bohannon are Certified Distressed Property Experts (CDPEs) who have special training in issues surrounding short sales and foreclosures.
- by Dale Bohannon
