Short Sale vs. Rent: Credit Impact and Being a Landlord
If your mortgage balance is higher than the amount that your home is worth, conducting a regular sale is hard to do. This leaves many people trying to figure out the feasibility of selling property, and wondering if a short sale is worth the credit damage or if renting out the home will come with too many landlord responsibilities.
Here at Hoffman Realty we review credit reports almost every day, especially when screening potential renters. The damage that a foreclosure does to your credit report is far worse than the impact of a short sale, so whatever you decide; make sure your home does not go into foreclosure.
The Pros and Cons of a Short Sale
The most obvious advantage of a short sale is that you no longer own the property.
One thing to remember, however, is that your lender has to agree to a short sale. If you have a high income and a lot of assets, the “moral hazard” clause, which forces lenders to allow a short sale for people with financial hardships, does not apply to you.
If your lender does agree to a short sale, your credit score will be affected, and you will probably not be able to qualify for another mortgage for several years.
Judgments and tax liabilities
There are other risks involved in a short sale, particularly deficiency judgments and tax liabilities. A deficiency judgment is the difference in what the home is sold for and what you owe on the mortgage. Your lender may reserve the right to try and collect that difference from you. For example, if you owe the bank $200,000 on your mortgage, and you sell your house for $160,000, the lender can come after you for that remaining $40,000. Your forgiven debt might also be viewed as income by the Internal Revenue Service (IRS). Therefore, the amount forgiven by your lender in a short sale might increase your tax exposure.
The Pros and Cons of Renting your Property
The pros involved in renting out your property instead of unloading it in a short sale are just the opposite of the risks we discussed above. When you choose to rent your home instead of selling it, you do not have to worry about the effect it will have on your credit. There will also be no deficiency judgment following you around, and your tax consequences will not add up.
The real estate market will eventually work in your favor
Another benefit to hanging onto your home and renting it is that the market will eventually work in your favor. In Tampa, the real estate market has bottomed out. If you keep your property, you will see prices start to climb again and your home’s value restored. Keeping your house means you will also have a property to move back into later on if you want to.
Having no experience or desire to become a landlord
The biggest con to the rental scenario is that you may have never intended to be a landlord, and you do not know anything about renting. You might worry about potential bad experiences with renters. Keep in mind those possibilities can be mitigated with an experienced property manager.
Another problem to consider is that the amount of rent you can charge might not match what you owe in your mortgage every month. This will require you to really examine your budget and figure out how to cover all your housing expenses.
Whether you decide to rent or short sell your property, contact us at Hoffman Realty. We can give you some advice on property management, and if you are trying a short sale, we can recommend a great legal advisor. Contact us or give us a call at (813) 875-7474.