FAQ's about "Short Sales"
Q: Does the short sale affect the owner's credit?
A: It's not like a bankruptcy or foreclosure that stays on one's credit. However, the owner's credit score could be affected by 100 - 150 points because of missed mortgage payments -- there can't be a short sale if the homeowner is not delinquent on his loan. The homeowner has the banks 'ok' to pay back less than what is owed on the home. The banks may report a 'settled for less than full balance' or 'paid in full' to the credit bureaus. Once the short sale is approved, the homeowner will avoid foreclosure, which would have a drastic affect on one's credit for the next 7 to 10 years.
Q: What's in it for the banks?
A: A foreclosure proceeding may be long and costly. The bank may decide it is much wiser to have a short sale then going through foreclosure to get the property back. The bank really doesn't want the property anyway.
Q: Does a short sale have tax consequences to the seller?
A: For income tax purposes, the debt that was forgiven could be taxed as if it were income. So, if $30,000 of debt was forgiven, the seller could have to pay income taxes on that $30,000. This rule may change because of the hardships involved.
Q: What if the seller said "Go ahead, foreclose on me"?
A: It is possible that any financial obligations would not be wiped away in a foreclosure. The owner may still have an obligation to repay any remaining balance. And say "goodbye" to having good credit or good interest rates on any credit cards, car loans, or home purchases for at least the next 7 years.