If you've recently received a promotion or job transfer that requires you to move across the country to keep your job, you may be concerned about the future of your home. For those in states that haven't yet recovered from the bursting housing bubble—or who purchased in 2005 or 2006 when prices were at their highest—selling in the current market could mean bringing tens (or even hundreds) of thousands of dollars to the table to fully pay off your mortgage. Should you pursue a short sale rather than pay to get out from under your loan? Read on, then click here for more about how short sales are treated by credit bureaus and future mortgage lenders to help you decide which path is right for you.
When is a short sale a good idea?
A short sale involves listing your home for sale at an amount lower than the outstanding mortgage. Once an offer is made and approved by your mortgage lender, you'll be able to sell your home without facing a delinquency judgment or having to bring cash to closing. In general, you'll need your lender's permission to list your home for sale as a short sale, and will often be required to list your home for sale at the mortgage price for a certain period of time before the lender approves your short sale listing price.
In some cases, a short sale can be a good financial move. If you've fallen behind on your mortgage payments or are so far underwater you'll likely never recover the original value of your home, pursuing a short sale can be a better option than hanging on to a losing asset for years or having your home seized through foreclosure. Once your home has been sold, you'll get to seek a fresh start without a foreclosure on your record.
What are the tax and credit implications of a short sale?
While short sales can be the right option for some homeowners, they do have a measurable impact on your credit score and may affect your ability to borrow funds in the future. Because short sales are reported as negative marks on your credit report in the same section as bankruptcies and foreclosures, your credit score may drop by up to 160 points. In general, the higher your score before the short sale, the more points you'll lose. The only way to avoid this score drop is to ensure your lender doesn't report this short sale as a negative mark—but because your lender will need to "charge off" the unpaid amount to receive a tax deduction, it's unlikely you'll be able to secure this type of agreement from your lender.
Unfortunately, this score drop can make it much more difficult for you to take out a mortgage on a property in your new location. In some areas with a competitive rental market, you may even be screened out of some apartments or rental homes due to your bad credit.
You may also be required to pay taxes on the amount of mortgage debt that was discharged through the short sale process. If your promissory note included a personal guarantee to pay, you may be taxed on the forgiven amount as "imputed income." You'll want to consult your tax professional before going through with a short sale to ensure you won't find yourself on the hook for a hefty tax bill.
Do you have any other options?
If you're not sure you can deal with the credit and financial consequences of a short sale, you may be able to rent your home out while the housing market in your area continues to recover. In many cases, you can command a high enough rental rate to pay your mortgage and related expenses as well as a property manager to perform minor maintenance and collect rents. Once your home is cash-flow positive, you should have no difficulty qualifying for another mortgage on a residence in your new state.