Does Short Sale Hurt Credit Rating?

[Tabitha1]

What is the name of your state? California (Los Angeles)

I'm in the market for a home in west Los Angeles. While looking around I'm seeing many properties being offered for 'Short Sale'. I understand this means that the seller is trying to sell it for less than he/she owes on the mortgage and that the bank must approve of the sales price.

Let's say it goes through - specifically the bank allows the owner to sell his property for $600k, even though he owes them $620K on the mortgage. The bank is giving the owner a gift of $20k. A couple of questions:

1) Does the seller have to pay income tax on the $20k?

2) Will the seller's credit rating be adversely affected?

Thanks.

[leedspaddy]

Originally Posted by Tabitha1

What is the name of your state? California (Los Angeles)

I'm in the market for a home in west Los Angeles. While looking around I'm seeing many properties being offered for 'Short Sale'. I understand this means that the seller is trying to sell it for less than he/she owes on the mortgage and that the bank must approve of the sales price.

Let's say it goes through - specifically the bank allows the owner to sell his property for $600k, even though he owes them $620K on the mortgage. The bank is giving the owner a gift of $20k. A couple of questions:

1) Does the seller have to pay income tax on the $20k?

2) Will the seller's credit rating be adversely affected?

Thanks.

Before 2007 the seller would have had to pay tax on the 20K but a Mortgage debt relief bill was signed into law last year allowing people doing short sales to be in most cases exempt from payingtax on the "gift" from the bank

Yes the seller's credit rating will be hit hard by the short sale but no where near as bad as the damage caused by a foreclosure