A short sale is when a homeowner sells his home for less than what is still owed on the mortgage. Typically, a short sale occurs in a distressed-mortgage situation, which comes about when a homeowner finds it difficult to make the monthly mortgage payments. In most cases a bad economy has decreased the value of the home, leaving the homeowner under water or owing more than the house is worth on the market. Often, mortgage lenders agree to a short sale to get the bad loan of their books. It can take anywhere from 30 to 60 days to settle on a short sale from the day an offer is received by the lender. In nearly all short sales there is an outside buyer who makes a low-ball offer on the home to the lender. For troubled homeowners, a short sale has pros and cons. Before getting involved in a short sale, consult your lender and other financial and real estate experts.
If your home mortgage payment is more than 31 percent of your income then a short sale might be right for you. The U.S. real estate lending market has seen a surge in short sales in recent years. Short sales avoid foreclosure and give lenders the option to recover some value from the loan. Having a foreclosure on your credit report can damage any future mortgage approvals.
In most cases, a lender involved in a short sale agrees to cancel all the mortgage debt after the short sale is complete. This is not a guarantee, however. Also, while in the process of a short sale, a debtor does not need to make any large mortgage payments. Make sure you know what your lender has agreed to in the short sale and what your fiscal responsibilities are.
Damage to Credit-Con
Going through with a short sale will damage your credit rating. Keep in mind, however, that the credit-rating hit with a short sale is usually not as severe as the damage a home foreclosure would bring to your creditworthiness.
If the lender agrees to the short sale offer and forgives any remaining debt owed on the house, there may be tax consequences. The lender will send you a 1099 form which shows the amount of debt that was canceled; which is taxable and will need to be paid by you. Consult an income tax professional for guidance in this case.