Understanding a Short Sale on Your Mortgage

Understanding a Short Sale on Your Mortgage

In past years, it was rare for a home owner to sell a home for less than he owed on the mortgage, but this is far more commonplace these days. The real estate meltdown has caused financial hardship for many home owners, resulting in an increase in applications for short sales. But what the heck is a short sale, and how do you qualify for one on your mortgage?

When home owners default on a mortgage, the lender forces the house or land into foreclosure and sells it as a bank-owned property. This is something that most mortgage companies will avoid if at all possible because they lose money when they foreclose homes. This puts the leverage in the hands of the home owner—in the presence of legitimate financial hardship—to argue for a short sale to avoid foreclosure entirely.

A short sale means that the mortgage lender agrees to accept less money for the property than what remains on the mortgage. For example, if you still owe $90,000 on your mortgage, but your home only sells for $80,000, you might qualify for a short sale. The mortgage lender will accept $80,000 and forgive the remainder of the mortgage loan, leaving you without a foreclosure on your record. This usually means that the lender cannot get more than $80,000 by foreclosing and selling it themselves.

Of course, I’m making it sound far easier than it really is. A legitimate financial hardship must be proven before a lender will grant a short sale, which means disclosure of all assets before a green light is given. If the mortgage lender believes that you are hiding assets, or if it’s apparent that you can afford to pay off the mortgage, there will be no short sale. Furthermore, any entity with a vested interest in your home has a say in whether or not a short sale is granted.

Also, you won’t qualify for a short sale until you actually sell your home. You can’t be forgiven on a portion of your mortgage and remain in the home. The sale price of the property will be taken into consideration by the mortgage lender before a short sale is approved.

Gather Documents. If you’re going to attempt to apply for a short sale, you need a way to prove that you don’t have sufficient financial means to cover the remainder on your mortgage. Bank statements, pay stubs, tax returns, stocks and bonds, and anything else that will be evidence of your financial situation should be collected.

Prove Change Occurred. You should also be prepared to prove that a change has occurred in your financial status if you want to qualify for a short sale on your mortgage. Perhaps your medical expenses have increased or maybe you took a pay cut at work. If you’ve taken on an additional dependent, that might also count as a financial hardship. Gather proof of these circumstances as well.

Prepare for Tax Penalties. When a loan is forgiven—regardless of the reason—the IRS requires you to pay taxes on the amount, just as if you’d received it in cash. Make sure you’ll have sufficient resources to cover these additional tax expenses.

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