Can a Short Sale Help You Recover Financially?[yoast-breadcrumb]
Can a Short Sale Help You Recover Financially?
Losing your home can be one of the most stressful life events. If you’re struggling to make mortgage payments, you may be wondering if a short sale is the right move for your situation. At Delancey Street Foundation, we help people get back on their feet after tough circumstances. In this article, we’ll walk through what a short sale is, who it can help, and some of the pros and cons to consider.
What is a Short Sale?
A short sale is when a homeowner sells their property for less than what they owe on the mortgage. This can help avoid foreclosure and save your credit score from taking as big of a hit.
Here’s a quick example of how it works:
- John owes $200,000 on his mortgage
- Due to financial hardship, he can no longer make the monthly payments
- His home is only worth $150,000 in the current housing market
- John requests the lender accept a short sale for $150,000 to avoid foreclosure
- The lender agrees and takes a $50,000 loss on the property
As you can see, the lender takes a loss with a short sale. But they’re often willing to approve them because foreclosure can be even more costly.
Who is Eligible for a Short Sale?
If you’re struggling to pay your mortgage, a short sale may be an option. Here are some common situations where homeowners pursue this route:
- Job loss or reduced income
- Divorce or death of a spouse
- Large medical bills
- Home value drops significantly
- Monthly payments become unaffordable
- Relocation for a new job
Most lenders will want to see proof of a valid financial hardship before approving a short sale. It’s not designed as an easy exit for those who can still afford their home.
The Pros of a Short Sale
There are some potential benefits to a short sale in certain situations:
- Avoids foreclosure – This prevents significant damage to your credit score and public foreclosure records
- No remaining mortgage debt – After the sale, your mortgage is closed and considered “paid off”
- More control than foreclosure – You can sell in your timeframe rather than the bank’s
- Potential for financial assistance – Some lenders offer incentives or aid for approved short sales
- Usually little impact on future loan eligibility – Most lenders understand extenuating circumstances
- Grace period to move – Short sales usually allow 60-90 days to vacate the property
For many homeowners, the biggest incentive is stopping foreclosure proceedings and avoiding that black mark on their credit history. If you have significant equity in the home, a short sale also lets you walk away without owing any remaining mortgage debt.
The Potential Cons
However, it’s not always smooth sailing. Here are some downsides to weigh:
- Credit score still takes a hit – Your credit will drop, but generally less than a foreclosure
- Tax implications – Any forgiven debt may be treated as taxable income
- No financial assistance – Lenders aren’t required to offer incentives for a short sale
- Major hassle – Heavy paperwork and patience is required throughout the process
- Risk of rejection – Lender may determine you don’t qualify and proceed with foreclosure
- Limited window to sell – You may need to accept a low offer to close in time
You’ll also want to research the impact on your state income taxes. Some states treat forgiven mortgage debt as taxable income after a short sale. And approval isn’t guaranteed – the lender will still evaluate your financial hardship claim.
Alternatives to Consider
If you don’t qualify for a short sale, there may be other options to avoid foreclosure:
- Loan modification – Your monthly payment is reduced by extending the repayment period or lowering the interest rate. See the Making Home Affordable federal program.
- Forbearance – The lender allows temporary reduction or suspension of payments. COVID-19 mortgage relief programs increased forbearance access.
- Deed in lieu of foreclosure – You voluntarily transfer ownership of the property to the lender.
- Bankruptcy – Filing Chapter 7 or Chapter 13 bankruptcy stops foreclosure proceedings while debts are restructured.
Refinancing or tapping home equity are other options if you have sufficient income and equity. We recommend speaking with a HUD-approved housing counselor to review all alternatives before deciding.
The Bottom Line
Trying to recover from financial hardship? A short sale could help you transition to the next chapter without a foreclosure on your record. But make sure you understand the credit impact, tax implications, and approval requirements in your state. With professional help, you can decide if it’s your best route to get back on stable ground.
At Delancey Street, we’ve helped many people through tough times over our 48 years serving the community. If you need support to overcome challenges, contact us to learn more about our residential self-help program and vocational training. There are always possibilities ahead.