The effect of a short sale on your credit
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 fore¬closure. If the property owner voluntarily selling the property can payoff 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 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.
- Submitted by Dennis Kowalski
(415) 229-1241
denniskowalski@princetoncap.com
posted by SFResidence.com @ 8:05 AM
1 Comments:
Well said.
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