The Short Sale Alternative To Foreclosure

Foreclosure and the idea of losing your home is scary enough but the threat of a deficiency judgment after the bank takes and sells your home can easily compound your stress.  In a foreclosure the bank takes your home and is required to sell it at auction, typically for far less than what you owe.  If the auction sale price does not satisfy your debt, the bank will have the option to obtain a judgment against you for the difference between what you owe and what the house sold for, plus costs and interest incurred during the foreclosure process.

One way to avoid a deficiency judgment is to short sell the home.  In a short sale, you list your home for sale, typically through a realtor, at its current fair market value, which is likely less than what you owe.  When you have an offer on the home, you then ask the bank to accept the offer and forgive the difference between it and what you owe.  This process requires that you submit a financial package to the bank, including a hardship letter explaining why you cannot pay your mortgage, and can take several months to complete.  However, banks understand that the short sale offer on your home is likely much greater than what the home would secure at auction, and it is often in the banks best interest to accept your short sale offer.

CAUTION: One negative of a short sale is that when the bank writes off your deficiency and agrees not to come after you for it, the amount of the write off is considered earned income to you for tax purposes.  This means that your tax return will show you earned the value of the deficiency and increase your tax burden, even though you never touched the money.  The good news is that in many instances the tax code offers exemptions that will remove the deficiency amount from your earned income, resulting in the short sale having no taxable consequence.

A short sale is typically better for your credit rating than a foreclosure sale and can be a valuable tool to protect your financial wellbeing.  At Matthew C. Bothwell, P.A. we are here to answer your questions and help you though the foreclosure process.  Give us a call, we can help.