Trying to sell a home that’s worth less than your mortgage balance can be stressful. A short sale can be a solution to explore.

What is a Short Sale?

In a short sale, you sell your home for less than what you owe on your mortgage, and your lender agrees to forgive the remaining debt. For instance, imagine you owe $200,000 but can only sell your house for $150,000. The lender would forgive the $50,000 difference.

Why Would a Lender Agree to This?

Foreclosure is a lengthy and expensive process for lenders. Short sales allow them to recoup some losses faster and avoid those extra costs.

Drawbacks to Consider

• Tax Implications: The forgiven debt from the lender may be considered taxable income.
• Potential Lawsuit: In some states, the lender may sue you for the remaining balance.
• Credit Score Impact: While not as severe as foreclosure, a short sale will still hurt your credit score.

Benefits of a Short Sale

• Avoid Foreclosure: This protects your credit score and allows you to control the selling process more.
• Potentially Qualify for a New Home Sooner: Foreclosure can severely limit your ability to get a new mortgage for years. Short sale may have a shorter recovery time.

The Short Sale Process

1. Gather Documentation: Prepare paperwork proving your financial hardship.
2. Contact Your Lender: Discuss the situation and explore “workout” options like forbearance or loan modification.
3. Get Help: Find a HUD-approved housing counselor and a short-sale experienced real estate agent and attorney.
4. List and Sell: List your home for sale with your realtor.
5. Deficiency Waiver: Once the sale is complete, request a waiver from your lender to avoid further financial liability.

Alternatives to Short Sales

• HUD Counseling: A HUD agency can help you explore ways to keep your home.
• Loan Modification: The lender may agree to change your loan terms to make it more affordable.
• Deed in Lieu of Foreclosure: You transfer ownership to the lender in exchange for avoiding foreclosure.
• Mortgage Assumption: If your mortgage allows it, you may find a buyer to take over your loan.
• Bankruptcy: This may be a last resort, but Chapter 13 or 7 can help keep your home or delay foreclosure.

Beware of Short Sale Scams

Avoid “agents” or “negotiators” promising unrealistic deals with your lender. Always verify credentials and references of any short-sale professional you hire.

Short Sale FAQs

• Is a Short Sale Right for Me? Consider a short sale if you can’t keep up with payments and other options fail.
• Will It Hurt My Credit? Yes, but potentially less than foreclosure.
• Is it Risky for Buyers? Short sales can be a good deal for buyers, but the process can be complex. Be prepared for potential maintenance needs.