- A short sale is a real estate transaction in which a lender agrees to a sale of a property for less than the amount owed against it. Owners who receive offers on their property, or who choose to seek buyers for their property, must bring the matter before the lender to ensure that a short sale will be permitted. The proceeds of the sale are put toward the balance on the mortgage.
- Short sales are usually mutually beneficial to both the lender and borrower.
A short sale can potentially be a preventative measure for borrowers who cannot afford to stay in their homes. Short sales allow borrowers relief from sizable debt without filing bankruptcy or the harrowing process of foreclosure, both of which can have a devastating effect on a credit report for years.
Lenders agree to a short sale with the knowledge that they will take a loss on a mortgage but that the loss will be offset by not having to foreclose on a property that may take months of expensive upkeep before selling. - While a short sale does not have to be a negative event as far as credit scores go, the time it takes to get the lender to agree to a short sale can have a damaging effect on your credit score.
"The lender won't tell you it will accept any less than what it is owed and also probably won't even discuss this until you're 60 or 90 days behind in your payments," warns Bankrate.com's Bobbie Dempsey.
Late payments are one of the most negative items for a credit score, but as long as you can stay current on other payments, the effect of late payments can be minimized long before a foreclosure or bankruptcy would fall off your credit report. - If you do get your lender to agree to a short sale, get it in writing that the lender will report the short sale to credit bureaus as "debt satisfied," rather than "debt settled for less than amount owed" and that no action will be taken to collect the remainder of the debt owed.
If the debt will be reported as debt settled, a settlement, in addition to the history of late payments incurred while pending short sale, can be nearly as damaging to your credit as a foreclosure. Additionally, if you live in a state where the lender can legally collect the difference between the sale amount and the amount owed, and the lender does not agree to waive that right, there is no compelling reason to go for a short sale. - Research your state's tax laws before deciding on a short sale. Not only do some states allow you to be sued for the difference between the proceeds of a short sale and the amount of the original mortgage, some also require you to pay taxes on the amount forgiven on the loan. The amount forgiven is considered a "gift" or other income for tax purposes, so taxes on the amount can be substantial and should be determined before a short sale is begun.
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