Is a Short Sale Ideal for Everyone Facing Foreclosure?

 Posted on February 22, 2024 in Bankruptcy

Facing foreclosure can be an incredibly stressful and challenging situation. As a homeowner, you are likely exploring any and all options to avoid foreclosure and save your home. One route some homeowners consider is a short sale. But is this the best option for every homeowner in danger of foreclosure? A Texas lawyer can help you figure out if it is the most viable option for your circumstances.

What is a Short Sale?

A short sale enables homeowners to sell their property and repay their mortgage loan at the current appraised value, even if they owe more on their mortgage than their home is worth. This avoids a foreclosure while relinquishing the property. With a short sale, the lender agrees to discount a portion of the loan balance since the sale proceeds will not cover the amount owed. This forgives the remaining mortgage debt.

Benefits of a Short Sale

There are some benefits to completing a successful short sale over a foreclosure:

• Less damage to your credit: A short sale results in less of a hit to your credit score than a foreclosure typically does. This can help with credit recovery down the road.
• Mortgage forgiveness: As mentioned above, the lender forgives the remaining mortgage balance not paid off by the short sale. This avoids owing additional money.
• Potential cash incentive: Sometimes mortgage lenders will even provide cash incentives for approved short sales, which can help the complex process.

Downsides of a Short Sale

However, short sales also come with their share of downsides, including:

• Complex process: Navigating the short sale process can be complicated, with extensive paperwork and strict guidelines. This may require professional guidance.
• Possible tax consequences: Any amount of mortgage debt forgiven may be considered taxable income, resulting in a tax bill.
• No homeowners insurance: Most insurance policies terminate with a short sale, meaning no coverage during the process.

Weighing Your Options

As a homeowner facing foreclosure, determining if pursuing a short sale is right requires weighing several key financial factors. First, review the gap between your mortgage balance and the property’s current market value. A wider negative equity gap makes a short sale more beneficial than foreclosure. Also, examine other assets the lender may require you to leverage before approving a short sale, like additional property, investments, or savings.

Evaluate your overall financial outlook when deciding on a short sale, including income, regular expenses, and ability to handle debts now and in the coming years. You will also want to discuss the potential tax implications following the short sale with a tax expert. Any forgiven mortgage debt could be treated as taxable income, resulting in a hefty tax bill. Mapping out these key considerations with professionals can help determine if a short sale is your best option or if surrendering the home makes more sense for your situation.

Contact a Boerne, TX Bankruptcy Attorney

A short sale can be an ideal route to avoid foreclosure for some underwater homeowners. But it is not necessarily the easiest or most ideal option for every homeowner facing foreclosure. Carefully evaluate your entire financial situation, understand the complex short sale process, and seek professional guidance from a San Antonio, TX bankruptcy lawyer. Call Law Offices of Chance M. McGhee at 210-342-3400 for a free consultation.