What is a Short Sale?

A short sale in the mortgage world amounts to a lender agreeing to accept a pay off less than the original mortgage. For example, if your mortgage was $200,000 and all your property would bring in todays market was $160,000, a lender may agree to accept the lesser amount to clear the debt. That amounts to a forgiveness of $40,000.

Why Would a Bank Say Yes?

It's a resignation on the part of the lender that this is the best it will get. Banks do not want to foreclose and they do not want to take the property (known as a deed in lieu of foreclosure). They are not in the property management business and foreclosure look bad on the books. It may even affect their ability to borrow if the lenders have too many foreclosures on the books, its not a stretch to wonder whether they have been prudent lenders.

Its not a Get Out of Jail Free Card

There are down sides to this procedure and it may not be the best alternative for you.

1. If their is a second mortgage on the property, its not likely the second lender will agree.

2. The IRS will consider the $ 40,000 of mortgage debt forgiven by the bank as gross income and the tax bite may be prohibitive. You would need to talk to your adviser (just when you can afford it right?) to confirm that the tax implications of a short sale make sense for your situation.

3. You cant fake this, you must truly be destitute. The seller will need to be in default. That is to have stopped making mortgage payments.

4. You must clearly have no equity left in the property for the lender to agree to accept less than the full debt owed.

5. It will be reported to the credit reporting depositories and it will remain on your credit report for 7-10 years. It's a derogatory

What the Buyer Needs to Know

1.You must have a firm offer before you ask the lender to approve the sale.

2.You do not have a deal until the lender approves your deal. The agreement with the seller is not the final agreement. The lender must agree to the purchase. It can be wise to create a contingency here requiring the lenders to respond within a specific time frame. This will give you a reason to back out if its dragging on.

3.The deal can be held up because lenders often will want to re-negotiate the commission structure, even though you have signed a listing agreement with your agent.

4.You can expect be offered the property 'as is?. This can be very a costly so we think you should have the property inspected by a building inspector, home inspection and a termite report. If you cannot negotiate the 'as is' component of the sale, cover yourself by knowing what you are buying. Make the deal contingent on your approval of the properties condition.

Why Do Banks Do It

1.Banks do not want property they want cash flow.

2.It may cheaper and less time consuming for the bank than a foreclosure process

Why Do Owners Do It

Although its reported to the credit agencies as a derogatory, its less severe than a foreclosure or bankruptcy and may be a bit kinder on your FICO score.
If you are looking for a short sale deal you might start with the lenders ?Lis Pendens' list. This is where lenders start the foreclosure process.

Howard Bell for yourpropertypath.com

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