The Truth About Short Sales

Realtors and "investors" are pushing "short sales" as salvation for the struggling homeowner. To summarize a short sale process:

The homeowner is struggling (usually).

The realtor or investor offers to arrange a sale to the realtor, investor or other party at less than the payoff (it is not always clear that this is what is happening, but the homeowner can easily determine this.

The homeowner signs the documents allowing the sale.

The homeowner owes the difference between the loan payoff and the sales price to the lender. For example, if you owe the lender $150,000 and sell the home for $100,000, you still owe $50,000.

The realtor or investor may be able to negotiate a forgiveness of the remaining balance, but this is not always possible.

The realtor or investor fails to tell the homeowner that

The short sale is a devastating credit hit. Many mortgage underwriters appear to treat it as the same as a foreclosure.

If you don't settle with the lender so that the lender forgives the difference, you will owe the difference, and the lender will likely sue you in an effort to collect the debt. See the section on judgments.

If you are not living in the home at the time of the sale, you may owe income taxes on the transaction (i.e., receive a 1099-C), or you may owe capital gains taxes.

A bankruptcy filing has the potential to minimize the harm of letting a house go by

Avoiding any remaining deficiency liability

Avoiding a forgiveness of debt tax event

By clearing up your debt-to-income ratio, the bankruptcy will improve your credit score over time.