Risks of Going Through a Short Sale Instead of Foreclosure

short sale

There’s a lot of talk about how short sales hold many benefits over foreclosures. While it is true that many homeowners will reap these benefits after entering into a short sale, like anything else, these sales are not necessarily for everyone. There are certain risks associated with short sales and when homeowners run into these, they could be in a worse position than they would be if they had gone through the foreclosure process. Below are some of the risks one might face during a short sale that all homeowners should be aware of if they are facing foreclosure.

The Lender Could File a Deficiency Judgment Against You

Short sales get their name because the proceeds from them are typically not enough to fully cover the cost of the debt still owed on the mortgage. When this is the case, a lender can file a lawsuit against you for a deficiency judgment. If the court decides in the lender’s favor, you will have a deficiency judgment issued against you. That means you will still have to pay the total mortgage debt that remains after the short sale.

For most homeowners, this is devastating. They are already in financial hardship, as they couldn’t keep up with the payments on their home. Now they have to find another place to live, potentially pay security deposits and first and last month’s rent, and face other costs, such as homeowners’ or tenants’ insurance. A deficiency judgment only adds to these costs at a time when you likely won’t be able to afford them.

There are ways to avoid deficiency judgments. One of the best ways is to speak to a Florida foreclosure defense lawyer who can help you fight the foreclosure altogether. If that’s not possible, an attorney can draft a short sale agreement with the lender and include within it a clause that bars them from trying to recover a deficiency judgment.

You May Face High Taxes

After facing foreclosure and learning about deficiency judgments, you may think that having the amount of that possible judgment forgiven is the best alternative. Unfortunately, there are some risks that come with this as well. Any time a debt is forgiven, the lender must issue you a 1099-C form, also known as the Cancellation of Debt form. This means that the IRS will consider that forgiven debt taxable income, which means you’ll have to pay taxes on it.

Again, this could put you even further into financial hardship. The remaining amount on a mortgage after a short sale is sometimes thousands of dollars. Depending on the amount, the taxes on that debt could also be in the thousands of dollars, which is likely something you can’t afford.

Unfortunately, after a short sale, you’ll only have two options. You can write in a clause that states the lender cannot come after you for a deficiency judgment and pay taxes on it, or you could repay the debt still left on the mortgage. The only way to avoid both of these situations is to prove that you were insolvent at the time the debt was forgiven. This typically means you will have to file for bankruptcy.

A Short Sale Will Damage Your Credit Score

Foreclosures will damage your credit score, and so will short sales. How much a short sale will affect your credit score isn’t really known. Some say that short sales don’t hurt credit scores as much as foreclosures, while others say that a short sale will cause just as much damage to a score as a foreclosure. The extent to which your credit score is damaged after a short sale will likely depend on your own situation. However, you can be sure that your credit score will take some sort of hit after a short sale on your home. You likely can’t avoid this, as a foreclosure will also do damage, but it’s important to be aware of it before entering into the short sale process.

You’ll Lose Your Home

It’s true that during a short sale and a foreclosure, you will lose your home. The repercussions of this are great. Families find it devastating when they are forced to leave their homes, and finding a new home can be very difficult, particularly at a time when you don’t have a lot of extra money. After a short sale, you’ll likely have to move out right away, and that’s usually a lot sooner than you’d have to move if you went through the foreclosure process.

The only way to avoid this risk is to speak to your lender about the possibility of a loan modification. Through a loan modification, you can remain in your home and avoid foreclosure and a short sale altogether. Instead, the lender will adjust your mortgage loan by changing the interest rate, lengthening the time you have to repay the loan, or making other adjustments that will make the debt more affordable for you. Not every lender will agree to a loan modification, however, so it’s a good idea to first speak to a foreclosure defense lawyer who can negotiate on your behalf.

A Florida Foreclosure Defense Lawyer Can Advise on What’s Right for You

When it comes to foreclosures and the possible defenses to them, there’s a lot of misinformation out there. One of those is that a short sale is always a better alternative to foreclosure. However, this isn’t true for all homeowners. Anyone who is facing foreclosure should always speak to a Fort Lauderdale foreclosure defense lawyer who can advise on the specific situation.

If you’re in fear of foreclosure, or the process has already begun, call Loan Lawyers today to speak to one of our attorneys. During a free consultation, we will review your case and advise on which option is best for you. No matter which option you choose, we will walk you through the entire process to help you achieve the best possible outcome. Call us today at (954) 523-HELP (4357) to learn how we can help.

Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation to see how we may be able to help you.