In simplistic terms, short sales are defined as being able to sell your property for less than what you owe the bank(s). In Colorado, this means the sale would be completed prior to your property being sold at the Public Trustee’s foreclosure sale.
Short sales do come with some consequences to the homeowner, however.
1) Credit Score Consequences. Usually by the time a homeowner has completed a short sale they have missed a few payments, therefore their credit score has already taken a hit. More the likely, the lien holder (the bank) will report to the credit reporting agencies that the debt was settled for less than the amount due. Currently, industry experts believe it will be 18 mos. to 2 years before the homeowner could qualify for a government backed loan (like FHA). It is believed that even though the credit score will take a hit, it is much less of a hit than a full foreclosure or deed in lieu.
2) Deficiency Judgements. In a simplistic example, if you owed your bank $200,000 for your property and you completed a short sale and your bank netted $150,000, there would be a $50,000 deficiency. In the loan documents you originally signed, the bank usually has the right to collect the full amount owed. When negotiating a short sale, there is a possibility of negotiating for full and final settlement. This means that the bank is agreeing not to retain the right to try to collect. If full and final settlement can not be negotiated, the bank could decide to pursue you for the balance. Many people really become concerned about this. Remember, if your property goes into full foreclosure, the bank has the exact same right.
So let’s think this through a little bit. Usually a person facing foreclosure or short sale has exhausted all of their monetary resources to keep their home. There simply is not much left. Will the bank spend money to pursue someone who has no money? Not generally. We, of course, cannot predict the future, but we generally recommend going through with the short sale.
3) Tax Consequences. When a bank takes less than owed, the bank could send you a 1099 for the deficiency. Receiving this 1099 creates a tax liability. President Bush signed legislation called ”The Mortgage Foregiveness Debt Relief Act of 2007″. This allows a qualifying taxpayer that completed a short sale after 2006 but before 2010 to not have to claim the deficieny as income. IRS Form 982 is the form that you will need to complete in the event that you receive a 1099. We have provided this form on our website at http://ownthishometeam.com.
Completing a short sale is usually considered one of the more favorable alternatives to foreclosure. It does carry consequences but they can be mitigated in some cases.
Posted by theownthishometeam 
