What Is A Short Sale?

With the housing market crashing down around the country, you have probably been hearing the term "short-sale" more often than usual.

The idea of a short sale is simple. When an owner sells their home for a price that is not enough to pay off the loan against the property as well as the cost associated with the sale, you have a short sale. When the lender agrees to the short sale it means that they will be accepting less money than what is due on the loan. (Not all lenders will agree to a short sale)

Example: You have a loan on your home for $150,000 and the property will only sell for $135,000.00, with a short sale the lender may be willing to accept the $135,000.00 as payment enough to release their lien against the property.

Will Your Lender Allow You To Short Sale?

You may ask what's the lenders motivation to let you sale your home for less than you owe. If the lender thinks that you are truly unable to keep up with your agreement, if they allow you to short sale the property it saves them a lot of future problems. However before a lender will agree to a short sale they will look at a two factors.

Reason #1
The first thing they look like at is whether or not the owner can afford the payments. When they are investigating this, they will look for what has recently happened that made the payments unbearable. During their investigation if they find that you lied on the original application, they will not be as willing to work with you.

Reason #2
On average it cost a bank around $25,000 to sell a home at foreclosure. So the second thing that the lender look at is if the house is sold on a short sale will it leave them in the same position as it would if they allowed the house to be sold at foreclosure. Of course, a lender will take the route that will cost them the least.

How Does A Short Sale Affect the Owner?

Saving credit is a primary concern. One of the things affected by a short sale is the owner's credit. Their credit score will generally drop by 80 points, which is much less damaging to the owner\'s credit report than a foreclosure or bankruptcy. It takes about 18 months for them to be able to purchase another home and receive a decent interest rate. Whereas the other options can take 3 or more years before you can qualify for a home loan.

Also, when a lender allows the short sale to take place, there is no guarantee they will not require you to pay the difference between what was paid and what is owed. So it is very possible the lender can get a deficiency judgement for the remainder of the money.

If the lender has forgiven the remainder of the debt, they will give you a 1099c for the cancellation of the debt. Anytime you have a debt that a lender has forgiven the IRS looks at this as income that you have received and you will be required to pay taxes on it as if you actually earned the money.

You Have More Options

A short sale may be what you need to save yourself some heartache and frustration. The affects are a small price to pay and less embarrassing than foreclosure or bankruptcy. But please don't forget that short selling your precious house, most likely isn't your only option. There are plenty more. You can read all about it in the Foreclosure Emergency Kit. It will help you to have a better understanding of your situation and your options to regain control over your life and your house. Claim your FREE copy here.