Avoid These Common Short Sale Problems

A short sale might be your best option for preventing foreclosure. But be aware that there may be unforeseen pitfalls to a short sale. Working with an experienced short sale agent will help you avoid these common short sale problems. Here are some short sale tips for you to consider.

Short sale tips

  • Make sure the lender agrees in writing that the short sale will take care of your debt to them. That way if you owe $300,000 and the short sale is for $280,000, the lender will not come after you for the $20,000 that you still owe.
  • Ask your lender how the short sale will be reported to the credit bureaus. If they report it as a debt that is satisfied then all is well. However, they could report it as “settled for less than full balance,” which is a negative mark on your credit score. Still, it is less harmful than a foreclosure.
  • Make sure you understand the tax implications of a short sale by consulting with a tax professional. You may have to pay taxes on the part of the debt that was forgiven, and the lender may issue you a 1099 for that amount. There are two exceptions that you might fall into. If you meet the IRS’s definition of insolvency when the debt was forgiven, generally you don’t have to pay taxes on it. Or, if your home loan was a non-recourse loan, you may not be liable. A non-recourse debt is secured by the loan collateral (the house) so the debtor would not have to pay tax on the amount not covered in the short sale. Most mortgages secured by the property are non-recourse loans. Still, you should check with a tax professional to find out if this tax law will affect your short sale.