When the amount of a mortgage is more than the home is worth, the property may be a candidate for a short sale. A short sale is when the lender agrees to take less money for the home than the amount that is owed on the mortgage. The balance, technically, can be attached to the seller, so if you are considering a short sale it is important to work with an experienced real estate attorney.



A short sale may make sense for a seller if they must sale the home and the value of the property has dropped. A short sale may also make sense if your home is in or close to reaching default status or pre-foreclosure status. If the seller needs a way to get out from under a mortgage, due to unemployment, a divorce, a health crisis or death, a short sale is an option to consider. If the seller has assets, such as in savings or investment accounts, it will probably not be possible to negotiate a short sale with the bank.

Who benefits from a short sale?

The one person who loses the most in a short sale is the seller. While they do get out from under the stress and financial commitment of a mortgage, they will also walk away with nothing. Any equity in the home is gone. The bank, while agreeing to take less money than what is owed on the mortgage, still benefits from the short sale. Because short sales typically occur when a home is in danger of being foreclosed on, the short sale prevents the bank from entering into the foreclosure process. It also takes the home off of the bank's hands. In a typical foreclosure, the bank has the responsibility of maintaining the property and getting it sold. With a short sale, the bank never has to take responsibility for the property. Those involved in the real estate transaction, such as agents, attorneys, appraisers and title companies, all benefit from the short sale. Although they may not receive their full fee when processing a short sale, they still make money from the process.

The biggest winner in a short sale is typically the buyer. By purchasing a home with a short sale, the buyer gets a home below market value. Because the amount that the bank will lend is based on the appraised value, when a home is purchased for less than that amount, a smaller down payment is required and PMI can be avoided. PMI, or private mortgage insurance, is a costly form of insurance that new home owners must purchase if they borrow more than 80% of the value of the home.

Disadvantages of Short Sale

Short sales can be a good decision for the home owner that cannot afford their mortgage, but they are not the answer to all financial problems. The Mortgage Forgiveness Act of 2007 states that the amount of debt forgiven by the lending institution can be considered income for the seller. Often, the lending institution will issue a 1099 to the seller, which means that they may be required to pay taxes on the forgiven amount.

Short sales also show up on the credit report. Although it would seem that a short sale is a better option than foreclosure, in the case of your credit history, they are the same. The short sale is listed as a pre-foreclosure that has been redeemed. The seller, regardless of how the rest of his credit history looks, will need to wait three years before getting a decent interest rate on a new mortgage.

Convincing the lender to agree

While lenders prefer a short sale to foreclosure, they strongly prefer that you pay off the amount of your loan when selling the home. It is up to the bank whether they will accept a short sale or not. The best way to convince the bank that a short sale is in their best interest it to prepare a package detailing the reasons you are considering accepting a short sale offer.

An estimate closing statement is the first step in convincing the lender a short sale is necessary. This statement should include the estimated sale costs, such as commissions and inspections fees, the unpaid loan amount and any late fees. If property values have dropped recently, leading to your homes value decreasing, ask your real estate agent to prepare a CMA, or comparative market analysis. The CMA shows homes in the area that are actively on the market, those whose sales are pending and homes that have been sold in the last six months. It will help strengthen your case for accepting a lower amount of money for your home. You should also include bank statements and other proof of income and debt, as well as a detailed hardship letter, which explains exactly why you feel it necessary to accept the short sale.

Short sales can be a good choice for buyers and sellers alike, but it is important to know what the drawbacks are before entering into a contract for a short sale.