While a short sale transaction can be a great way to sell your home without coming up with the difference on the Note, and what you can sell it for, it can come with a lot of surprises on the back end. For starters, it may be quite difficult to obtain financing for a new home for 2-3 years ( sometimes 7 if you wish to get a conventional loan). Many real estate companies boast of their success of placing people in new homes immediately after a short sale, but getting a loan after a short sale is much more difficult than the masses think. The FHA guides state that if you were never late on a mortgage payment during the entire short sale process, then you can get a new loan directly after through them. However, in reality most lenders will only oblige if you have had what’s called an extenuating circumstance ( which in an underwriters eyes only means death of a wage earner or a divorce). Also most banks won’t agree to a short sale unless you have missed payment, which presents a catch 22.
Some other downsides to short selling your home are that it bruises your credit, and clearly shows to new creditors that you couldn’t manage your biggest liability/asset, your home. Your crdit score will drop drastically ( depending on how many late pays you have), plus your credit card companies do sneaky things like do soft credit checks. So your credit cards rates will misteriously go up, or shrink your credit lines.
If you woudl like to move into another home, and are underwater on your current. Please consider the above mentioned comments, and at least secure financing for you new home first, then think seriously about the damage that can be done by doing a short sale. Not to mention you may have to pay taxes on the discharged amount. Although if it was your primary residence, and all the loans were used for the home, you can most likely get out of paying taxes on the amount that you will be 1099’d for.. at least until 2013.
Somerset Lending would be happy to consult you on these types of important topics, our stance will always be a conservative one.