A short sale happens when a lender such as the bank allows the sale of a home by the home owner for less amount of money than what is owed; but there are consequences of a short sale that need to be considered. For example, if you owe $ 300,000 from a bank and decide to sell your home for $ 250,000 there will be a balance of $ 50,000 that you will not be covering, so this is a short sale. A short sale only happens if a mortgage lender allows the transaction to take place. A mortgage lender allows you to sell the mortgage for less after you prove that you can no longer continue with the initially agreed mortgage payments.
How will a short sale affect you?
The consequences of a short sale directly affect your credit worthiness. A short sale or a foreclosure are all recorded as defaulted loans which is severe to your credit worthiness from then going forward. In some cases, your credit score can be lowered which means higher interests on future loans and credit cards. However, there are some isolated cases of short sales which have less serious consequences on your credit worthiness, when you have not missed a payment on the mortgage but the mortgage lender allows you to sell for less. This might not even affect your credit score.
The other consequences of a short sale that you might face are the inability to immediately to buy another mortgage. However, this will depend on the loan, the down payment put down and the mortgage company. Though very rarely some companies will allow you to immediately buy a mortgage after a short sale. Some companies will require you to take some years before buying another mortgage and even then they might require a higher percentage on the down payment.
With the consequences of a short sale you are more likely to face unpleasant tax issues. Incases whereby during market upswing the owner of mortgage used home equity to unrelated mortgage matters such as college tuition for the kids, tax consequences are unpleasant. Example, you owe a mortgage lender $ 300,000 and a home equity loan of $ 50,000, which was used on other, unrelated home issues. When a short sale takes place you sell your mortgage at $ 270,000 and repay the mortgage lender $ 250,000 and on the home equity loan you pay $ 20,000. The balance, that is $ 50,000, with the mortgage lender will be considered a non-taxable income and can be forgiven but the balance on home equity loan which is $ 30, 000 is considered taxable since it was used on unrelated issues.
Most people who have suffered a short sale especially in the U.S. suffered when there was financial instability in the country. During this time most people were forced to give up their mortgages, but since the economy has improved most of these people estimated to be more than 3 million will be home owners by 2021. Also consider trying different local lenders who are more committed to the development of the communities. Consequences of a short sale might seem harsh to deal with but after some time you will be back on your feet and ready to be a home owner.