What is a Short Sale?

This is a very common question and sometimes to the average consumer very confusing compared to a Foreclosure. 

Basically, a short sale can be an excellent solution for homeowners who need to sell, and who owe more on their homes than they are worth.  In today's unusual market conditions, banks and lenders have become much more negotiable when it comes to these types of transactions. Recent changes in government policies by the Departments of the Treasury & Housing and Urban Development have also improved the chances of getting a short sale approved. 

The decline in market value of a property below the total debt owed on that property does not automatically qualify a homeowner for a short sale. Banks take several factors into consideration when determining if it will allow for a short sale to occur. For homeowners to qualify for a short sale, they must meet all of the following circumstances:

• The Home's Market Value Has Dropped - Comparable sales must substantie that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.
• The Mortgage is in or Near Default Status  -  It used to be that lenders would not consider a short sale if the payments were current, but in many cases, lenders realize that other factors contribute to a potential default making them eager to head off future problems.
• The Homeowner Has Fallen on Hard Times  -  The homeowner must submit a letter of hardship that explains why they can not pay the difference due upon sale, including why the homeowner has or will stop making the monthly payments.
• Insolvency - The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.

• Tax Consequences.   If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness.  Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007.

You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.

• Blemished Credit Report.   A short sale will show up on your credit report.  It's a pre-foreclosure that has been redeemed.  Short sales affect credit ratings.  While the damage to your credit report may not seem as bad as a foreclosure to you, creditors may not make the distinction.
  

A short sale is the process by which a homeowner can sell a house for less money than actually owed on the mortgage(s).

There are alternatives to bankruptcy or foreclosure proceedings for homeowners/borrowers who can no longer afford to keep mortgage payments current. One of those options is called a "short sale." Sometimes, to avoid going through the costs of foreclosure, a lender will sanction a short sale by allowing a homeowner to sell (allowing a buyer to purchase) the home for less than the mortgage balance while the home is in pre-foreclosure stage.

Sample steps of a short sale:

1. Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval.
2. The owner, or if the owner has an agent, finds a buyer who makes an offer for less than the amount of the mortgage.
3. Seller accepts the buyer's purchase offer subject to the lender’s approval.
4. Seller's lender accepts the buyer's purchase offer.
5. Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.