- A short sale eliminates mortgage debt and avoids foreclosure. It is a negotiated agreement in which the bank agrees to accept less than the amount owed on the mortgage. The bank might prefer to negotiate a short sale so it never owns the property and the house transfers to a buyer immediately. A short sale does not reflect as negatively on the owner's credit rating as a foreclosure. It also creates the option of obtaining future financing for a new home in as little as two years as opposed to seven years under a foreclosure.
- The tax consequences of a short sale can often outweigh the relief it provides the homeowner. The mortgage company will report the amount of the debt left unpaid to the IRS, which considers this a form of income. The mortgage lender will issue a 1099-C form and the homeowner must pay taxes on the amount of debt forgiven. Consult an accountant or tax adviser before beginning the short sale process to determine the tax impact it will have on the household.
- In a short sale, the home lists on the market just as a normal real estate listing would. In the background, the mortgage company acts as an additional party to the transaction and will need to approve the listing price. The lender works with the real estate agent through each step of the sale process. This includes reviewing contracts from potential buyers, negotiating terms of the sale, and closing on the property.
- To prepare for a short sale, gather your bank statements, paychecks, bills and all other financial information to prove financial hardship to the mortgage lender. Contact a local real estate agent who can act as a liaison between you and the mortgage company. Work with the real estate agent to draft a letter explaining why it is advantageous for all parties to negotiate the short sale on the home. Submit the letter and your financial documents to the mortgage company for consideration.
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