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What Is A Short Sale?

The real estate market has hit on some tough times. You may find yourself among the millions of homeowners whose homes have become more worrisome than happy. The short sale of a house is a good method that can help people who are unable to make their monthly payments and need a way out.

A short sale is an agreement by a lender to take less than the principal owed as payment on a loan. The advantage to the lender is that by doing this they can avoid the expense of a foreclosure. Also, the lender really does not want your home, he wants your money.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property.

With a foreclosure, the lender can lose up to 40 percent of the mortgage amount because of the extra costs involved with foreclosing on property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. It is sometimes in the best interest also for the lender to accept the short sale.

How A Short Sale Works

In order to be eligible for a short sale a borrower must prove that they are unable to pay their loan and that a foreclosure is pending. The borrower must find a buyer for their house at a price, which is comparable to the market in the area.

Then they must write an explanation of the situation. Financial information will be requested. Finally if the deal is accepted the lender will write off the unpaid debt. The borrower can later be taxed on the amount as income if no proof of insolvency is provided.

The information required may include:

• W-2s and pay check stubs

• Bank statements

• Hardship letter – this letter will describe the reasons the borrower is in the

• Financial position they are in with all necessary backup proof

• Fair market value for the property

• Listing agreement and purchase agreement

• Preliminary proceeds sheet from the sale of the property

When the lender reviews all of this they may or may not approve the short sale. If they do not approve, they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the lender will take the loss.

The borrower is still not off the hook. The lender has the options to try to collect the shortage and may require the borrower to sign a note to repay the shortage. They may also file a collection for the amount of the shortage.

This is something that an attorney with expertise in this area of real estate needs to be consulted. Also, the IRS may come after the borrowers for income taxes on the amount of the shortage. If the shortage was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount.