What is a Short Sale?

A short sale is a sale of real estate where the proceeds of the sale are not enough to cover the amount owed on the loan on the property.  Usually a short sale happens when a borrower cannot afford the mortgage payment and the lender decides that selling the property at a loss is better than going through the foreclosure process to repossess the property.

Pros of a Short Sale

• The borrower is able to “get out” of the mortgage loan he cannot afford.
• The bank is able to sell the property to another borrower who can afford the monthly payments.
• The new borrower is able to purchase the home for less than the previous owner owed.
• Both the bank and the borrower avoid the costs associated with a foreclosure.

Cons of a Short Sale

• Your credit history will be damaged.  Most mortgage companies will not lend to you for a period of time, typically seven years, after going through a short sale.
• The borrower/seller is frequently responsible for the deficiency (the difference between the sale price and what they owed on the mortgage).
• If a portion of the deficiency is forgiven by the lender, you will be have to pay income tax on the amount that was forgiven.
• The short sale process typically takes months before an offer is accepted and the new purchaser has no idea when or if they will get to purchase the property.

Who Should Participate in a Short Sale?

• If you can’t afford your mortgage payment, then going through a short sale is your best bet.  If you are looking for a home to purchase and you have a flexible timeline, you might be able to get a good deal on a house through a short sale.