What is a Short Sale Anyway?

An increase in foreclosure rates will inevitably bring with it an increase in

short sales. But what is a short sale?

A short sale happens when you sell your house for less than your remaining

mortgage balance, the proceeds of which go to the lender and in return the

lender forgives the remaining balance. Selling your home as a short sale is one

way to avoid foreclosure.

As a general rule, lenders lose money when they foreclose on a property.

Consequently, they would rather not have to foreclose if it can be avoided. A

short sale represents an opportunity to cut their losses because a short sale

usually allows them to recoup more of the cost of the loan than a foreclosure

process would.

However, don’t think that a short sale is an easy thing to accomplish. In order

to get permission for a short sale, you must provide documentation showing a

genuine financial hardship. And don’t think that the decision for accepting a

short sale is solely in the hands of the lender. Sure the lender must first agree,

but this is not the final word. If there is mortgage insurance involved, this

company also gets input on the decision. If there is an investor backing the

mortgage, they also get input as to whether to accept a short sale.

The transaction process for a short sale can be rather cumbersome as well,

whether you’re on the buying or selling side. Many short sales fail due to

additional demands by the lender, such as requiring the broker to reduce his or

her commission and/or that the seller signs a document requiring him or her

to pay back the shortfall.

If you’re on the selling side of a short sale, consider having your agent or other

experienced professional negotiate with your lender for a better deal. And

remember, if the lender does accept a short sale and forgives part of your debt,

that is considered taxable income and you must declare it as such to the IRS.