In this difficult economic environment, many Charlotte homeowners find themselves underwater on their mortgage. Many homeowners have heard about a short sale, and ask if this is a better option than a foreclosure.
The simple answer is Yes. A short sale is a much better option for a homeowner than a foreclosure. Here’s why:
1) Credit: If your house goes into foreclosure, this could negatively impact your credit for up to 10 years. A short sale on the other hand is less severe. A short sale may only impact your credit for up to 2 years. If you short sale your home and maintain your financial worthiness, then you can re-establish good credit in a shorter amount of time.
2) Another consideration is how long you need to stay in your home. If your house if foreclosed upon, then you will be forcibly removed by local law enforcement. Yet, with a short sale, you can remain in the house during the sale negotiations. Clearly a short sale is a much more practical option.
3) There are additional financial considerations of a short sale versus foreclosure. In a foreclosure scenario, you will get a deficiency judgment for the entire amount you owe. This amount will need to be declared on both federal and state taxes. If your lender agrees to a short sale, you might have to pay income tax on any resulting deficiency. But there are some exceptions that will allow you to avoid paying this tax. According to the Mortgage Forgiveness Debt Relief Act, you may qualify for an exemption if the loan was secured by your primary residence. Under this act, you can exclude up to $2 million in forgiven debt. In this scenario, you do not have to pay income tax on the deficiency.
It is best to get the most amount of money for your property in a short sale to cover any deficiency judgments. One way to do this is to work with an experienced real estate professional who can get you multiple offers on your property.
Now is a great time to consider a short sale if you are a homeowner. The Home Affordable Foreclosure Alternatives Program (HAFA) aims to make short sales easier for homeowners and the banks involved in structuring the loans. Not only will HAFA make it easier to complete a short sale, but borrowers can get a $3,000 “relocation incentive” and servicers (ie- banks) will get $1,500 for handling a short sale. This program will go into effect on April 5th, so if you are a Charlotte homeowner behind in your mortgage, this could be a great time to consider a Charlotte short sale.
Disclaimer: For all financial issues or concerns, it is advisable to consult with a tax attorney and/or CPA. Content in this article is not tax advice, and is only a representation of possible outcomes during a short sale or foreclosure situation.