With today’s housing market many individuals find themselves in the unhappy position of owning a home where the balance owed to the mortgage company is far greater than the value of the home. Many of those finding themselves in this circumstance want desperately to get out from under the house.
One method used to accomplish this is selling the home to a buyer for less than the balance of the mortgage. This is referred to as a short sale.
Short sales can help an individual extricate themselves from a house, but there can be issues which arise from a short sale that are unexpected.
A short sale must be approved by the mortgage company. If there is a second mortgage, the second mortgage must also approve. It is often difficult to get a mortgage company to approve a short sale. One may invest a great deal of time in finding a buyer and setting up the sale only to have it fall through at the last minute. The process can be extraordinarily frustrating.
In addition, sometimes when a person sells a house on a short sale, the mortgage company will force the seller to sign a note agreeing to pay the difference between the short sale purchase price and the balance owed on the mortgage. This leaves the seller without the property and with a frequently large unsecured debt. More often than not, a person selling a home on a short sale will end up owing almost the entire amount of the second mortgage on the property as well.
Before agreeing to sign such a note, one should be aware that in Minnesota a mortgage company holding a first mortgage is only allowed to pursue an individual for the deficiency balance on the first mortgage in very limited circumstances if the property is foreclosed upon. Signing a note in a short sale would make the seller responsible for the difference between the sale price and balance when if the property had just been foreclosed on, the individual would have not been responsible for the difference.
A mortgage company does not have to have the seller sign a note for the difference. The mortgage company can elect not to pursue the difference and forgive the debt. If the mortgage company forgives the seller for the difference in sale price and the amount owed, there can be tax consequences. In certain circumstances the difference will be considered taxable income. Anyone planning on selling a house on a short sale would be wise to consult with a tax professional before agreeing to the deal.