Living in Portland

This is a very complex subject but I would like to mention the major points in hopes of saving you or someone you know huge financial pain.

First, a Bank will only approve a short sale on a primary residence if the Owner is insolvent and cannot make the monthly payment. There must also be a Hardship. If you have other assets, the Bank will require you to use them.

Second, in many cases you may still owe the Bank the difference between the net sales price and the total loan balance including all late fees and penalties. This is called a ‘Deficiency Judgment‘ and Banks are turning these over to collection agencies for recovery. If you have a second mortgage it is almost guaranteed that they will come after you for repayment. You should always consult an attorney to discuss your options. It may be better for you to go into foreclosure or even bankruptcy. In the case of foreclosure in Oregon, there is no Deficiency Judgment.

Third, In many cases the amount of debt forgiven is taxable (1st and 2nd mortgage).  You should always consult a CPA prior to entering into a contract. Now that it is tax season I’m hearing all kinds of stories about sellers receiving 1099s in the mail for well over a hundred thousand dollars. It this money doesn’t qualify for special tax treatment, the IRS considers it regular income and will collect taxes on it.

A short sale will negatively impact your credit score in a big way. It will be years before you will be able to get another home loan.  Just how long is unknown since this is a relatively new procedure. If at all possible you should stay current with all of your other payments. If the mortgage is the only ‘ding’ on your credit report and everything else is reporting as ‘paid on time’ your credit score  will recover much faster.