What is a short sale?

The Short Sale Process

Let’s say that you’ve purchased a house worth $300,000. You were able to buy this house by using:

• $50,000 down payment
• $250,000 mortgage loan from the bank

You have successfully purchased the house, but now the bank expects a monthly payment from you on their loan. Luckily, you have a job, so you can keep paying on that house.

But what happens if you lose that job?

If you lose your monthly income and don’t have savings, you’ll still have to make payments on your house. If you can’t afford to make payments, you can do one of three things:

1. Let your house go into foreclosure
2. Sell your house at full cost
3. Put your house in a short sale

You could attempt to sell your home at full price. However, if your home does not sell, you could be even more in the hole, and your bank still expects you to make payments.

This is why short sales can be an attractive option.

Short sales can be negotiated in conjunction with a bank. You can talk to a bank and get permission to conduct a short sale.

If you get permission, the bank could forgive the rest of the loan that you used to purchase the house. This absolves you of any financial obligation.

To successfully conduct a short sale, you may have to do the following:

• Prove financial hardship
• Get permission from the bank
• Successfully sell your house

Short Sale vs. Foreclosure

Letting your house go into foreclosure has the strong possibility of wrecking your credit. It could ruin your ability to purchase large ticket items for up to 10 years.

Risk is still involved in short sales. Even if they have given you permission for a short sale, your bank is under no obligation to forgive your loan. Though you’ve gotten permission to short sell your home from a bank, they could still report you to a credit agency.

A bank reporting you to a credit agency could have about the same effect as letting your home go into foreclosure. Your credit could be wrecked, and you could be precluded from further investments.

You may have to pay income tax if your loan is forgiven by the bank. Occasionally, the IRS considers any forgiven amount on a loan as income. This requires tax to be paid on it.

A bank may prefer to go into a short sale instead of a full-value sale. Foreclosures aren’t just problematic for you; they can also be costly for banks to withstand. Short sales could end up being less expensive compared to foreclosure proceedings.