Consequences of a Short Sale

What are the consequences of doing a short sale? You are wise to ask, because there ARE consequences.

Certainly, your credit WILL BE impacted. The average “drop” is 100 points for a short sale, but this depends on how the bank reports the sale to the credit bureaus. Some will report that it was “satisfied in full” while others may say that it was “settled for less than owed.” We have no control over how the bank reports the sale.

You will receive a 1099-C at the end of the year showing that you made extra income. This extra income is the amount that the bank was shorted, or the deficiency. For example, if you owed $250,000 on your home and you short sold it for $150,000. You will receive a 1099-C at the end of the year stating you made $100,000. The Mortgage Forgiveness Debt Relief Act of 2007 will protect many sellers in a short sale situation and make them exempt from paying the taxes on the deficiency. Individual circumstances vary, however, and we very strongly recommend that you speak to a CPA to see if you will qualify for this exemption.

Although Arizona has anti-deficiency laws in place for homes that are foreclosed on, these same laws MAY NOT apply to short sale situations. For this reason, it is important that your realtor have the bank put in writing that they will “release the lien AND SATISFY THE DEBT.” You want to be certain that no one will file a deficiency judgment against you after the short sale is executed.