A short sale of real estate happens when the owner of the
home or property owes more on the property than what it sells for. This can
happen when a home owner chooses to sell when property values have dropped drastically
or when an owner has taken out equity loans on top of the mortgage loan and
the loans equal more than the value of the home. A short sale can also occur
when a homeowner is forced into foreclosure and the bank sells the house for
less than the amount still owed. In any case, when all is said and done, the
owner comes out owing money instead of earning a profit after the sale of the
property.
The
credit implications for a short sale are very different
for those voluntarily selling their property and those forced into foreclosure.
If the property owner voluntarily selling the property can pay off the amount
owed out of pocket by using assets already owned there should be no credit implications.
If the property owner needs to take a new loan from a bank in order to make
up the difference from the short sale, then the credit implications would be
the same as the credit implications of taking out any loan. In fact, sometimes
taking out a loan can improve a credit rating. Whether the new loan raises a
credit score or lowers a credit score, most likely the new credit score will
not be drastically different than the property owner's credit score before the
short sale.
However, if the short
sale is due to foreclosure, the property owner's credit could be negatively
and severely affected. Here is why. Say the homeowner owes $100,000 on the foreclosed
property, but the lender only gets $70,000 from the sale. The lender can then
sue the homeowner for the $30,000 difference. But, the homeowner won't have
the $30,000. If he did, he most likely wouldn't have gone into foreclosure in
the first place. If the lender chooses to sue, and the homeowner cannot pay,
a deficiency judgment would appear on the homeowner's credit report, negatively
affecting the homeowner's credit.
Often, the bank chooses not to sue, but to take the loss as a tax write-off.
In this case, there would be no deficiency judgment on the homeowner's credit
report; however, there is another implication. The $30,000 that the homeowner
did not have to pay would be considered by the IRS to be income. The lender
will send a 1099 to the homeowner at the end of the year, and the homeowner
will be required to pay taxes on that $30,000. Even when the bank chooses not
to sue, the foreclosure can end up showing up in credit checks because it is
a public record.
Answer Submitted on Tue, Oct 31 2006
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