My Real Estate Blog

A short sale could be a better deal than bankruptcy or foreclosure, but it can also sap your time, wither your credit score and well, cost you money.

 A short sale occurs when your lender agrees to accept a lower price on your home than the current mortgage balance, provided you meet the lender's requirements and have a qualified buyer.

Your lender is the key to a successful short sale transaction and it will need to feel confident in the new buyer.  While recent cahs incentives for you and your lender make short sales more enticing these days, incentives alone won't get the job done. To go the distance on a short sale, you must document you are a hardship case -- but not because you falsified the original loan documents.

It can be a win-win scenario -- the bank reduces a portion of "bad debt," avoids foreclosure costs and keeps the home occupied, while you shed a housing payment you can't afford.

Don't come up short, prove your case

To prove your case, you'll need to spend some time on a cover letter explaining your hardship and provide full financial disclosure; the original purchase contract; a balance sheet of your income and expenses; asset statements, proof of income; bank statements; two years of tax returns; and a professional who knows the ropes.

Simply stating, 'My house is worth less than the loan and I don’t want to pay any more,' will not be acceptable.

Along with the required documentation, you stand the best chance of getting through the two- to seven-month short sale ordeal if the home is marketable; the second mortgage holder (if there is one) gets a cut or otherwise goes along with the deal; the same lender holds all mortgages; and there is enough time before foreclosure (at least about 4 months).

A major reason why a short sale fails is the length of time it takes to get the lender’s approval. Long delays frequently cause the buyer to drop out and buy another home.

Buyers can also suffer lost opportunity. They risk the opportunity cost of losing out on another property if they are tied up in a long, protracted short sale negotiation which could potentially go on for months.

The burden to make the deal work falls largely on the seller's shoulders and their ability to do their homework up front, making things as easy as possible for a potential buyer. A short sale works in your favor if your mortgage debt is secured by your home and was used to acquire, construct or substantially improve your home.

Short sales that stop short

Don't count on a short sale if you can't prove hardship; you are current on your mortgage; are in bankruptcy; have recently completed a cash-out refinance or have a lien with a third party.

Because a short sale forgives a portion of the debt owed, that portion could be considered as taxable income and you should seek the advice of a tax attorney, certified public accountant, enrolled agent or other person fully schooled in the tax ramifications of a short sale.

While a short sale won't be as damaging as a foreclosure or bankruptcy, expect some negative impact. Variables include how the lender reports the deal and what's already on your credit report. Negatives compound.

Consumer Reports' Money Advisor suggests that before you enter a mortgage modification or short sale, ask how the lender will report it so you can weigh your priorities.

If you need the break, take the deal sooner rather than later, even if it will hurt your credit score. Negatives on your credit file are removed after seven years. The sooner you get the clock ticking, the better.

Keep in mind, you don't control the final decision.

You aren't selling a home on the open market so much as you are selling your case to the lender.

Lenders are under no obligation to accept a short sale and the terms will be examined closely by the lender.