What is a Short Sale?


A short sale is an alternative to bankruptcy or foreclosure for many homeowners.  If a borrower is unable to keep their mortgage payments current they can sell their house for less than they owe in a short sale.  A lender may sanction these proceedings as a means of avoiding foreclosure costs.

The process of a short sale includes:

1.       Listing the home subject to selling as a short sale with third party approval

2.       The seller accepting an offer made below the amount currently owed

3.       The lender approving the offer accepted by the seller

4.       The lender releasing the lien upon receipt of funds


Qualifications for a Short Sale

There are several qualifying factors beyond the decline in market value of a property for a short sale.  A value below what is currently owed does not necessarily mean that a bank will allow for a short sale to happen.

Qualifications include:

  • A drop in market value below the balance of the mortgage substantiated by comparable sales in the area. 
  • A mortgage in default will likely qualify for a short sale but a loan nearing default status may also cause a lender to approve a short sale in order to prevent future problems.
  • A letter of hardship explaining why a homeowner is unable to or will soon be unable to make mortgage payments.  Some examples of hardship include loss of employment, divorce, sudden illness, bankruptcy, and death.
  • A borrower that can provide a tax return proving they have no assets that they can access to pay the shorted difference.


Short Sale Consequences

Two things are necessary for a short sale to occur, the first one being finding a buyer for the home and next, the lender must accept the offer made by a potential buyer.  Without both of these, a short sale cannot occur.

Consequences of a short sale include:

  • Tax consequences such as the right of the lender to issue a 1099 for their loss causing you a tax liability.
  • A blemished credit report that reflects a pre-foreclosure that has been redeemed.  Many creditors will not distinguish this from an actual foreclosure.

Article Provided By: Donna Anders, The Anders Team With Prudential Preferred Realtors