If you’re struggling to pay your mortgage every month or have already missed several payments, you may be wondering what will become of your home and how much longer you can afford to hold on to it. Unfortunately, unless you have a realistic expectation of a financial windfall or a significant salary increase, you may soon find yourself asking not how to keep your house, but how to walk away from it with the least amount of financial baggage.
Florida homeowners in this situation tend to choose from two main options: foreclosure or a short sale, which is the sale of your property for less than the outstanding balance of the mortgage. Despite its name, a short sale can be a long process, typically not beginning for at least six months after a borrower misses their first mortgage payment. Although your mortgage lender or real estate agent may advocate a short sale over foreclosure, that doesn’t necessarily mean it’s the right choice for you. Before taking any big steps, consider the long-term impacts.
Neither foreclosure nor a short sale looks great on your credit report, but a short sale has a slight edge because it demonstrates that you were willing to work with your lender on a solution to your debt. You may also have some input on how it will appear on your report. Your score will still suffer because the lender is taking a significant hit, but a “settled” account doesn’t appear as damaging as a foreclosure, which will lower your score about 300 points and stay on your record for seven years.
There are also taxes to consider. The IRS views either a foreclosure or a short sale as a sale of your home. The debt that is discharged is considered taxable income, which could result in a significant tax penalty. However, the Mortgage Forgiveness and Debt Relief Act may allow you to exclude this canceled debt from your income.
Before you choose either option, however, you should exhaust all others. To ensure you’re making the best choice, it’s crucial that you consult an experienced bankruptcy attorney. If you decide on foreclosure or a short sale, your attorney can help you through the entire process and get you back on firm financial footing — hopefully with a roof over your head.