What is a Short Sale?

Ahhhh, that is a question I get a lot these days. In a nutshell, a short sale is when the bank agrees to take less than what is owed on the house. The remainder of the money that is owed on the house is forgiven.

In the previous housing market, when everyone rushed out and got their 100% financing, adjustable rate mortgages, everything was fine as long as the house prices continued to climb. When they started to drop to more realistic levels, and when the mortages started to adjust, people could no longer afford the new mortgage, yet they couldn't re-finance because they owed more than what the house would actually appraise for.

So, in order to avoid the extreme mark on your credit report, and so the bank can avoid the cost of foreclosing on the property, many banks will agree to a short sale.

So, you're now asking, how do I approach this? The first thing is to call them up. Explain your situation, and ask them if they will be willing to agree to a short sale. As long as you're selling your property, you can ask your favorite Realtor to do this for you. Realtors have strong negotiating skills, after all, it's what we do all day long! Realtors are also unemotional third-parties who won't get lost in the current situation that could affect his/her ability to negotiate an effective solution on your behalf.

You're probably thinking this is quite simple! Before you start hopping on the phone, there is more you should know. Most banks (if not all) will issue you a 1099 for the remainder portion of your loan that you did not pay off. They will consider this income and thus, you will be paying taxes on this money. Another gotcha is that some banks (I take this on a case-by-case basis) will put "settled for less than full balance" on your credit report. These are some of the things you should ask your bank when and if you plan to do a short sale.

I hope this helps! Happy house hunting!


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