Homeowners who are looking to complete a short sale in the coming months may be in a position where either high levels of unemployment that seem to be continuing into the summer of 2011 or decreases in a home’s equity have continued to plague these men and women to the point where they can no longer afford their mortgage. Reports have shown that over recent months home values have continued to drop and there are some negative predictions on the horizon for homeowners who are currently facing the loss of value in their home, and for this reason among others, many are looking for a short sale on their home as a way to find relief from their negative equity or financial strain.
However, there are certain aspects of a short sale that some homeowners may not be aware of and, as a result, should be explored before this route is offered. Many homeowners have seen the foreclosure alternatives that were brought about through short sales or deed in lieu of foreclosure plans as a way to escape their negative equity situation or avoid a formal foreclosure when financial troubles have arisen, but certain cases have led to homeowners being pursued for the difference in the amount their home was sold for and what they originally owed on their mortgage.
As a simple example, if a homeowner owes $100,000 on their mortgage and sells their home for $75,000, there have been instances in the past where a bank will pursue a homeowner for the remaining $25,000, which is obviously a very troubling situation for homeowners, particularly when they have been in a predicament where they could no longer afford their home and simply do not have the financial ability to pay this cost.
Also, some homeowners are finding that if they have a certain amount of mortgage debt forgiven through a short sale plan, it will be counted as income and they may have to pay taxes on a sizable sum of money, which again, is a matter that will only complicate a homeowner’s situation when factors like unemployment or other sources of financial distress are present. To go even further, there have also been indications from studies conducted by the Fair Isaac Corporation that a consumer’s credit rating could be just as severely damaged through a short sale as it would from a traditional foreclosure.
What this means for homeowners who are in a financial position where they want to avoid the loss of their home to foreclosure is that alternative forms of foreclosure prevention assistance should be sought out before a short sale is considered, as there are not only federal modification initiatives, unemployment assistance plans, and state-specific programs still in place but if a short sale is inevitable, homeowners must take certain precautions. Simply put, options like the Home Affordable Foreclosure Alternatives program usually have provisions that will guard homeowners against a servicer pursuing them for the difference in what they owed and the short sale price, but homeowners must make sure their short sale agreement will specify that this will be the case.
Also, officials are prompting homeowners to, once again, not only research foreclosure laws in their state to see a servicer could potentially pursue them for the difference, but also, if the amount on their mortgage debt is forgiven during a short sale will be counted as income and therefore will be taxable. Short sales have helped some homeowners, but they are not optimal and, once more, a short sale should be avoided if at all possible, yet homeowners do need to take care to review a short sale agreement if it is their last resort so that they will not find themselves still paying on a home in which they no longer live.