Home Property What is a Short Sale?

What is a Short Sale?


One of the many things that homeowners do not want to do is to file a bankruptcy. However, if you wish to escape foreclosure, it is better to file bankruptcy than reduce your credit score with late payments and more interests. Getting yourself a Short Sale instead would be a win-win situation not just for you but also for the lender and the buyer.

A short sale is a transaction wherein the lender allows a lower amount to be paid for the remaining balance of the property instead of being unpaid for a long period of time. It is also applicable when market crashes are forecasted and the property is set to a lower amount to be paid, instead of losing further in the future. Also sometimes called shorted sale, it gives the lender, the seller and the buyer lower amounts of loss and extra costs that would be spent on dealing with debts and other settlements.

Knowing the Players

When purchasing a property, the full amount may not be paid. This amount is temporarily covered by the bank from which the purchaser of the property owes. If the purchaser then realizes that the value of the property is less than the total balance due, the purchaser may sell the property. In this case, the original buyer becomes the seller of the property and sells it to another buyer. Instead of not getting repayment for the balance owed, the lender then agrees to receive a lower amount than the original. This benefits the lender because it will avoid the property depreciating further. It is helpful for the seller and the buyer because they would pay less than the usual cost.


Before making any decisions, understanding the qualifications for a short sale is important. If the market value of the home has dropped and the actual value of the property is less than the unpaid balance, the home may qualify for a short sale. Forecasted market crashes are not enough. Other factors may also affect the value of the property. If the seller is not able to pay the total difference amount, a letter of hardship must be submitted explaining the circumstances affecting the ability of the seller to make a payment.


Although the property has been settled for a lower amount, the lender may issue a 1099 in accordance with the law regarding debt forgiveness. Certain situations like

It is helpful to have the advice of an accountant and a lawyer to provide a rough estimate of how much the tax accumulated by the difference is. Another aspect of the total financial picture that might be affected is the loan status. Although a short sale will not show up on a credit score report, it may affect the credit ratings.


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