To put it quite plainly, a short sale will cost the bank less money than having to foreclose on the property.While the homeowner usually can avoid paying a few monthly payments while waiting for the property to sell, it is less costly for the bank to short sale than undergoing foreclosure and having to fork out cash for lawyers, legal fees, landscapers, rehabilitation on the home, homeowners association fees etc.
What happens to my credit?
While it is truly difficult to say explicitly how a credit score will be affected by a short sale it is clear that a credit score could face a hit of a few hundred points.Outside of this it is important to understand the laws of your state. In “recourse” states, banks are able to go after (seek legal restitution) homeowners for the difference between the amount owed on the note and the amount for which the home was sold.Non-recourse states on the other hand force banks to drop this amount.
It is worth a one-time fee to an accountant to discuss the tax ramifications of the short sale. No matter if you live in a recourse state or a nonrecourse state, banks will undoubtedly dispense a 1099 making you liable for that difference between the mortgage balance and the sold amount as income.