If you owe more on your mortgage than your home is worth and you can no longer afford to make payments or need to move for personal reasons, you may qualify for a short sale. With this type of transaction, you seek a buyer to purchase the home at fair market value and negotiate with the mortgage lender to forgive the balance of the loan.

These are the factors you should consider when deciding whether to pursue a short sale for a home with an underwater mortgage.

Credit impact

 Like a foreclosure, a short sale will negatively impact your credit score. The exact amount of the decrease will vary depending on your overall credit history, but may prevent you from purchasing another home in the next few years. Be sure to plan your next housing move before the short sale, whether you want to buy a more affordable property, stay with family or rent an apartment.

Alternative options

 Weigh all the possibilities before deciding on a short sale. For example, you may be able to qualify for a mortgage relief program through your lender, negotiate a more favorable interest rate, rent out the property or cash out investments to bring money to the table when you close on the sale.

Tax implications

 If your mortgage lender agrees to forgive the loan balance and you successfully complete a short sale, you may have to pay income taxes on the forgiven amount. Although the Mortgage Debt Relief Act of 2007 provides a tax break to some home sellers in this situation, Massachusetts homeowners must pay income tax on the deficiency.

Lender agreement

 Your lender must provide approval for a successful short sale. Some mortgage companies will not grant permission unless you are already behind on your loan, which further impacts your credit.

Short sales offer a way out for homeowners who are struggling with a difficult mortgage situation. Whether this path will work for you depends on your individual circumstances.