If you're headed for a short sale but doubt you can catch up on payments in the meantime, you may be advised to secure a new place to live now, rather than waiting until the short sale shows up on your credit report. But bad credit is going to make it hard to get approved for a new residence. Trying to rent an apartment, for example, may not be possible with bad credit. If your home is foreclosed, that leaves you nowhere.
As soon as possible -- the minute you see that you may be about to fall behind on your mortgage and believe you won't be able to catch up -- begin the lease application process. If circumstances with your home change for the better, you may be able to sublease the rental or back out (probably at a price), but at least you won't be homeless.
Taxes are another important consideration when you're looking at a short sale. Tax laws regarding short sales tend to vary, and some years you may be liable for paying taxes on the difference between the purchase price and what you actually owed on your house. The bank would send you a 1099 form showing the amount they forgave. The amount on the 1099 then shows up just like any other income for you, and you'll pay income taxes on it just as you do regular income from your job. Be sure to know the IRS implications of a short sale. Sometimes you or your accountant can negotiate with the bank the manner in which the "paid settled" will be reported to the IRS.
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