What Is A Short Sale Foreclosure?

One reason a lender may opt for a short sale transaction is to keep from paying the costs involved with a complete and full foreclosure process. With a short sale, the shorted or discounted amount will not include title or escrow charges, real estate commissions, or any recording fees involved. Sellers do not profit from a short sale, however, buyers can.

Qualifications for a short sale

The prerequisite for a short sale foreclosure includes if the seller of the property has “fallen on hard times.” This would be demonstrated through a loss of job, going through a divorce, dramatic medical bills due to a sudden illness, death of a spouse or significant contributor to your income, or a filing for bankruptcy. Other than these extreme circumstances, it is likely a short sale transaction would not be imminent.

Other rationale why a property could be considered for a short sale foreclosure is if the seller has no assets, if your mortgage is close to going into default or has defaulted, or if the market value on your home as dropped. Ideally, all four of these conditions must be met if the property is to be considered for a short sale process.

Shorted amount may have to be repaid

If the seller has a savings account, a 401K, stocks, or bonds, he is considered to have assets and will have to at least re-pay the shorted amount to the lender at some point in the future.

This method of short sale contract is still open to several obstacles. The seller has to get an offer from a buyer for the short sale amount and the lender has to agree to it. Even when all is said and done, there could be consequences for taking this road. The lender could possibly file a Form 1099 with the IRS, showing the shorted amount. You might possibly have to pay taxes on that amount. Legislation was passed entitled, “The Mortgage Forgiveness Debt Relief Act of 2007,” but there are certain exceptions to this law.

Credit rating

While your credit rating won't be as bad as if a full foreclosure were to have taken place, there will still be a negative mark against you with a short sale transaction. It is possible that some future creditors will look disparagingly upon it.

As a last resort and before going into complete foreclosure, this method should be considered. A short sale foreclosure can be a friend in a time of need. Seek advice from an expert before you decide on a course of action.

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