Foreclosure News: What is a Short-Sale?

By Sheryl Landrum
Mortgage Credit Problems Columnist

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In home foreclosure terminology, a short sale is when a lender will accept less than the amount owed on a mortgage. When homeowners are unable to keep current with their house payments and are in danger of a mortgage foreclosure, many will simply walk away from their homes--leaving their credit in shambles. Other homeowners may opt to negotiate with their lenders to accept a short sale, paying the bank less than what they owe; however, while a short sale may avoid a home foreclosure, does it protect you from further liability or credit damage? Not necessarily...

Lenders that accept a short sale in lieu of foreclosure may not forgive the amount of the shortfall they are still owed. If you are worried about a home mortgage foreclosure you need to speak to your lender immediately to see what options are available. If a short sale seems to be the recourse in order to prevent the foreclosure, make sure you have all the details and potential repercussions given to you in writing. Ask them whether the debt will be forgiven in full or if there will be a judgment issued for the loan balance; also, how will the short sale be reported on your credit report? Will it show as a charge off or will it show as a balance paid and an account closed? Also, be aware that if you do a short sale with your lender, you may avoid a home foreclosure but you still are accountable to the IRS.

Be aware that the IRS can consider debt forgiveness as taxable income. Talk to your tax advisor, and a real estate attorney, and discuss the tax ramifications and legalities of a short sale before you proceed. While a short sale can help you to avoid a home mortgage foreclosure, it may not resolve all of your financial problems. Seek advice from those who can offer competent guidance before you commit to a short sale of your home.

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