What is a short sale?

A short sale is a transaction in which the homeowner sells the home for less than the balance of the mortgage.  The main purpose behind the sale is discharge of the remaining balance between sale value and mortgage value.  These sales require approval by the lender but are, in my opinion, worth the effort.

Why shouldn’t you just walk away and allow foreclosure?  First, foreclosure leaves a collectible debt.  The deficiency – the difference between mortgage and sale value – is a collectible debt that can follow you for years.   One of the benefits of a short sale is that the lender will waive the deficiency, discharging it through a 1099-C and stipulating they will not pursue the same.

The second major reason is that a short sale – properly negotiated – can impact your credit less than a foreclosure.  The total impact to my credit in our short sale was approximately 80 points.

Finally, you can qualify for a mortgage sooner with a short sale than with a foreclosure.  For us, it was 23 months from close of short sale to new mortgage.

Questions?  Give me a chance to help! Email me at rob@rtrcolorado.com, or call 719-440-6626!


2 thoughts on “What is a short sale?”

  1. What if you are currently renting the house but want to get out from under it? I’m going through a divorce and we have a house but its resale value is below market value. Can I still short sale with it currently being rented?

    1. What state are you in, Austin? The short answer is yes, you can. However, unlike a primary residence, you will likely owe the IRS taxes on the deficiency. The IRS treats forgiven debt as taxable income. That said, it may be worth it depending on the value of the home vs. what you owe, how much out of pocket you are coming, etc. I can give you a more informed opinion if you shoot me an email with your state, mortgage value and estimated value of the property now, along with what you’re renting it for and what your current mortgage is.

      Edit: regarding the tenants, they have some rights, too, but there presence will not affect the sale (except as a function of their rent being calculated as your income…and any potential buyer may like/dislike their presence).

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