Drawbacks of short sales

One of the mortgage-debt-related difficulties some homeowners face is having negative equity. A homeowner has negative equity if their home is worth less than the mortgage debt they have on the home. According to RealtyTrac estimates, having mortgage debt that exceeds their home’s value by at least 25 percent is a situation that around 7 million homeowners here in the U.S. are in.

A negative equity situation can be remarkably tough on a homeowner, particularly if they are also facing other financial difficulties. Thus, those in a negative equity situation may be looking for ways to address their situation. One option such individual sometimes think about is reaching a short sale arrangement with their mortgage lender. A short sale is an arrangement in which a home is sold and the proceeds of the sale go towards the mortgage debt, but the selling price is less than the mortgage debt.

When it comes to any option for addressing a negative equity situation, it is important to look at the potential drawbacks. There are multiple drawbacks that a short sale can have. 

One is that this option does not allow the homeowner to keep their home.

Another drawback is that a homeowner who agrees to a short sale can still end up facing considerable mortgage debt. This is because they can still be liable for the amount that the selling price fell short of the total mortgage debt. Generally, when a short sale occurs, a homeowner is liable for this deficiency amount unless the lender expressly forgives them the amount. Many times, lenders will refuse to give such a forgiveness.

Another drawback of short sales is that, if a lender does decide to forgive the deficiency amount in a short sale, the homeowner can face a major tax liability. This is because, under current federal law, short sale deficiency amounts that homeowners are forgiven of this year generally will be considered ordinary income and will be subject to taxation at the federal level. As a note, this could change depending on whether some legislation that is coming before Congress is ultimately passed.

A short sale is not the only option out there for addressing a negative equity situation. There are others, including bankruptcy. Bankruptcy lawyers can help homeowners who are in a negative equity situation look into what options might be in their best financial interests and might best serve their goals.