Why Short Sales are A Viable Option

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Madeleine Jones
May 20, 2016

Home For Sale Real Estate Sign, Short SaleShort selling a home is a viable option for many families. New laws imposed on banks have made the foreclosure process more onerous therefore many banks short sell as an alternative to foreclosure. There are many pros and cons to short selling a home. It is a relatively easy way to get out from under a bad mortgage, but it does come with some downsides. For example, a short sell does impact credit scores.

Short sales Most people think that short sales are only available for people that are financially distressed or unable to make payments. That isn’t true, a short sale is useful for anyone who has an underwater mortgage or a bad investment in a home or other property.

Usually a short sale has little long-term impact on a person’s credit score or ability to secure a new mortgage. Short sales are a viable option for many people, not just the financially distressed.

FHA Loans It is a common myth that short selling a home prohibits prospective buyers from securing a new FHA-secured loan, this isn’t true. There is no waiting period if the mortgage was not in default and all prior mortgage payments were made on time for at least 12 months before the short sale.

However, if the mortgage was in default at the time of the short sale then there is a mandatory three year waiting period unless there were extenuating circumstances. For example if the short sale was induced following a lost job, divorce (in some circumstances) or a serious illness or death in the family, then the three year waiting period can be shortened or waived.

Moreover, none of these rules apply to non-FHA secured mortgages.

Effect on Taxes Normally when debt is forgiven, like during a short sale, it must be recognized as income and taxes must be paid on it. But the Mortgage Debt Relief Act of 2007, which was extended to 2016, allows taxpayers to avoid these taxes if they sell their home for less than the mortgage balance.

Effect on Credit Credit scores are affected by short sales but the effect is different for each person, it depends upon the situation. Most of the time credit scores recover in 12 to 15 months after a short sale. Short sales may seem intimidating but they are manageable. There are pros and cons but it is an option worth exploring.