What is a Short Sale Anyway?

  • Luci Edwards
  • 05/15/22

An increase in foreclosure rates will inevitably increase short sales with it. But what is a quick deal?

A short sale happens when you sell your house for less than your remaining mortgage balance, the proceeds go to the lender, and in return, the lender forgives the remaining balance. Selling your home as a short sale is one way to avoid foreclosure.

Generally, lenders lose money when they foreclose on a property. Consequently, they would rather not have to foreclose if it can be avoided. A short sale represents an opportunity to cut their losses because a fast deal usually allows them to recoup more of the loan cost than a foreclosure process would.

However, don’t think that a short sale is easy to accomplish. To get permission for a quick sale, you must provide documentation showing a genuine financial hardship. And don’t think that the decision to accept a short deal is solely in the hands of the lender. The lender must first agree, but this is not the final word. If mortgage insurance is involved, this company also gets input on the decision. If an investor is backing the mortgage, they also get information about whether to accept a short sale.

The transaction process for a short sale can be rather cumbersome, whether you’re on the buying or selling side. Many short sales fail due to additional demands by the lender, such as requiring the broker to reduce their commission and that the seller sign a document requiring them to pay back the shortfall.

If you’re on the selling side of a short sale, consider having your agent or other experienced professional negotiate with your lender for a better deal. And remember, if the lender does accept a short sale and forgives part of your debt, that is considered taxable income, and you must declare it as such to the IRS.

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