What are the consequences of short selling my home?
This is the most frequent question I get asked from homeowners, when they are thinking about short selling their home.
Here are some situations I’ll go over with you in this post:
- Being issued a 1099
- Promissory Note
- Deficiency Judgment
- Credit issues
- Cash Contribution at closing
Now before I go into more details, real estate agents can not give you tax or legal advice unless of course they are CPAs or attorneys. I am neither. I will share my experiences and point you in the right direction. With that said, let’s move on with the program!
Being issued a 1099. When you close on a short sale, obviously there’s an amount that the lender doesn’t collect and is forgiven. That amount can be taxable as income. So for example, you sell your house for 100k, owe 200k, the short amount is 100k plus closing costs that the lender paid on your behalf. The 100k can be taxed as income. I know that sounds bad, but you may be able to reduce that amount or eliminate it all together. There’s a Mortgage Debt Relief Act of 2007 that may help you eliminate it. Even if you don’t qualify for that, you may still be able to reduce or eliminate it. To find out more, you need to contact your CPA to discuss your tax options. I can’t give you tax advice, but I am able to point you in the right direction.
Promissory Note. The lender may ask for a promissory note, usually for 0% interest, monthly payments for 10-15 years, it depends on the amount and their new terms can vary. If you have a true hardship, typically they will not require one. If you have PMI (private mortgage insurance), expect a promissory note from them. PMI happens when you put down less than 20% on your loan. Part of your mortgage payment you pay, goes to PMI. This helps the lender to recoup their loss in the case of foreclosure or short sale. Sometimes the lender puts PMI on your loan after the fact and you may not be aware you have it. If you’re not sure you have PMI, just give your lender a call.
Deficiency Judgment. This is when the lender pursues their right to come after the amount that was short on your short sale or foreclosure. We always ask for this right to be waived and often the lender will agree. There are times they don’t agree, but it doesn’t mean they will pursue it. If they do pursue it, you may be able to negotiate it down. Just as I’m not a tax consultant, I’m not an attorney either, so you should consult an attorney on the legal ramifications of doing a short sale.
Credit Issues. Short sale sellers are concerned about the damage a short sale will do to their credit. More than likely the lender is going to report your short sale to the credit bureau. It will say something along the lines of: agreed settlement short of full payment. That will cause a drop in points and really it’s hard to say how much. If you’re able to make your payments all the way until closing, you will minimize the damage. Late pays can really drop your score. I’ve had short sale sellers report to me a 100 point drop with the first late pay. Now, if eventually you want to buy a home again, you may have to wait 2 to sometimes 7 years depending on your situation that caused you to have to short sale, money down, what type of loan, etc.
Cash Contribution at Closing. It is very possible that you may not have to bring a dime to closing, if you have a financial hardship. If you have other assets and some cash in the bank, the bank may require a cash contribution. Sometimes, I’ve seen the net the lender wants is a little higher than what the deal will bring. Sometimes the buyer will contribute to that, the bank agrees to a lower net or the seller can contribute.
These are the major list of consequences you can expect, but it’s not the complete list. Every seller’s situation is different. Speak to a CPA and an attorney for all your options. Feel free to call me at 904-910-3516 or email me if you want to discuss your unique situation.
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