Definition

It's very common in today's depressed real estate market for home sellers to receive offers that are far less than the amount owed to the lender. A short sale may be your best option.

A short sale is an acceptance by your lender of title to your house for less than the total amount due on the loan. Some lenders will not accept short sales, because it makes better sense to foreclose.

When is a Short Sale Appropriate?

There are two instances where a short sale is suitable.

• The first is on the sale of your house. Suppose you owe $250,000 on your mortgage. You put your house on the market and the best offer you get is $230,000. After closing costs and real agent commission you will be far short of the amount you need to pay off your loan. Approach your lender and explain your situation. Ask if it will accept your net sale proceeds as payment in full.
• The second is when you receive a loan from a third party. If, for instance, your parents are able to loan or gift you an amount that is reasonably close to the loan-payoff amount, the lender may accept this as payment in full. If the bank accepts this amount, you keep your house.

What your Lender Considers

Before agreeing to accept a short sale, your lender must first determine if the offer received on your house is the best obtainable. Second, its need proof that you are unable to pay off the loan deficiency (the difference between the amount owed and the amount offered.)

The lender looks closely at your income and expense statement. This financial statement must be supported by a hardship or "short sale" letter spelling out the special circumstances causing you to fall into arrears. You will need to explain how those changes or events impaired your ability to make payments. Finally, you must explain why you don't think your situation will improve in the future.

If your lender accepts a short sale, it writes off any balance. Assuming that there are no junior liens (such as a second mortgage), you are free from your mortgage obligation.

Points to Consider

• Short Sales are not for everyone. You won't qualify unless you have a genuine hardship.
• A short sale negatively affects your credit score and appears on your credit report for seven years.
• A short requires more work for your real estate agent than a regular sale. Your agent may be required to accept a reduced commission by the lender. Not all agents handle short sales.