What is a short sale?

A short sale occurs when the net proceeds from the sale of a home are not enough to cover the seller's mortgage obligations and closing costs, such as property taxes, transfer taxes, and the real estate commission.  The seller is unwilling or unable to cover the difference.

Some - although not all - short sellers may also be in default on their mortgage loans and be headed for foreclosure.  However, home owners who bought at the top of the market or who took out large amounts of equity with a refinance and who now need to sell because of divorce or job transfer may also find themselves upside down, owing more than the home is currently worth when closing costs are factored in.

If sellers in a short sale situation have assets, such as stocks or a high-salaried job, a lender will not let them walk away from a short sale without signing a note to repay what they owe.

What do I do when there is more than one mortgage involved?

If there are a first and second mortgage or a home equity line of credit, both lender should be contacted to get approval for a short sale.  You need to contact the loss mitigatore of the bank(s), rather than the collection or customer service department, which is only interested in recouping past due loan payments.  You may also need to get approval from the mortgage investor.  This may complicate things since the second, or junior, mortgage holder might have to absorb the loss.  Be sure to stay in contact with your bank.

What information will the bank need to decide whether to accept a short sale?

The seller should submit a package containing W-2 forms, bank statements, two years of tax returns and other financial documents pertaining to income and debt obligations.  Seller should also submit a "hardship letter" explaining the circumstances that made impossible for them to make payments.

What are the options besides a short sale?

Lenders are now offering loan modification options.  This option may extend the term of the loan, add on delinquent payments to the loan principal, and possibly reduce the interest rate of make the loan more manageable for the home owner.

What financial or credit liabilities will a seller have as a result of a short sale?

Many lenders ask sellers to sign a promissory note for all or part of the difference between the proceeds of the short sale and the debt obligation as a condition to short sale.  In such cases, the note gives lenders the right to sue a seller and attach other assets if the not is not paid when due.

What tax liabilities will a seller have as a result of a short sale?

It is possible that any amount forgiven by the lender might show as income to the seller and he might have to pay taxes on that income, even if no actual money was received.  The IRS requires lenders to submit a Form 1099 stating the forven amount.    Sellers who meet the Internal Revenue Service definition of insolvency (either in bankruptcy or with debts exceeding assets) will not have to pay taxes on the forgiven amount.