Benefits for Sellers
- Limits impact on your credit: A short sale won't impact your credit as negatively as a foreclosure, which is considered the second most damaging event to your credit history after a bankruptcy.
- May avoid a deficiency judgment: You may not have to pay a deficiency judgment if you live in a state that doesn't allow them or if you persuade the lender to waive the deficiency amount. However, you could owe taxes on the forgiven amount.
- Manage the sale: While the bank must approve the offer, you're still in control of the sale. By contrast, you would have no control over the sale process in a foreclosure.
Drawbacks for Sellers
- Damages your credit: A short sale could remain on your credit report and negatively affect your credit score for up to seven years (in addition to any late payments leading to the short sale.
- May not reach a deal: There's no guarantee you'll find a buyer or that your lender will approve the offer.
- Could still owe the lender: You may still be on the hook for the remaining deficiency balance if your lender pursues a deficiency judgment. Lenders in some states may sue to collect the deficiency amount after a short sale.
- Could incur tax liability: You may have to pay taxes on the forgiven deficiency balance.