Short Sales vs Foreclosure 

Short Sale definition:

A real estate short sale exists when a homeowner sells a property for less than what is owed to the lien holders with the lien holders permission. This typically happens to avoid foreclosure.

How will a short sale affect my credit?

There is no set answer. It all depends on how the mortgage lender reports the transaction to the credit bureaus. Usually, it is not as bad as a foreclosure but still has a negative impact on it.

There isn't any profit! Once all lien holders and expenses related to the closing are paid, there isn't any money left.

Will I have to repay the difference or pay taxes on the difference?

It all depends. If the home is your primary residence and qualifies under the Mortgage Forgiveness Debt Relief Act of 2007, you probably will not have to pay any taxes. If it doesn't qualify then the bank has the option to forgive your debt as part of the deal, require you to repay the difference or report the difference on a Form 1099. The Form 1099 would have to be reported on your taxes as income.

Why would the lien holders agree to a short sale?

Honestly, the lien holders are not thrilled with doing a short sale. They are losing money that was lent in good faith that it would be repaid in full. However, they know its better to lose a smaller amount with a short sale than the larger amount with a foreclosure.

Steps to take: 

1. Contact your lender. You may have to talk with several people before you can find someone who may be willing to help you with a rate reduction or to refinance your loan. If you are one of the lucky ones, you will be able to keep your home at a monthly payment you can afford.
2. Contact a Realtor who is experienced in short sales. The realtor will discuss your situation, the value of your home and possibly list your home as a short sale. In this meeting, you will be asked to provide a financial statement of all your income and expenses and a hardship letter explaining why you need to do a short sale.
3. When you settle on a Realtor, you will need to provide letters of authorization for your agent to talk directly with your lien holders. This will make your life much easier! The agent will have much better luck acquiring the cooperation of the bank.
4. As soon as a buyer makes an offer, the agent will work with the bank and to reach a deal. It would be a great idea to have your own attorney involved during the negotiations with the bank. The attorney fees may be able to be included in the settlement. Just keep in mind that Realtors are not attorneys or accountants and can't give legal or financial advice!
5. During the negotiations, the mortgage lenders will order either an appraisal or a BPO inorder to verify the selling price.
6. When the bank grants approval, the deal may close. There is no estimated time for the approval process. The only guaranteed factor is that it will not be quick!
7. If you have missed any of your payments, everyone will have to pay very close attention to the court calendars to make sure the foreclosure process doesn't make it impossible to go through with a short sale.

Other professionals that should be involved:

Attorney - make sure you hire one that is experienced in short sales. There will be situations inwhich you will need legal advice especially if the clock is ticking towads a foreclosure.

Accountant - especially if you need financial advice on the possibility of paying taxes on the debt.

Benefits of doing a short sale:

1. You find a solution to a financial nightmare that does not seem solvable.
2. The bank is able to reduce their loss by avoiding the costly and timely expense of foreclosure and in some cases eviction.
3. The buyer of the property is able to buy at a great price. 

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