- Short selling isn't a common practice, but in certain situations a lender will forgive a percentage of the amount due on a home loan and let borrowers sell the home for less than the balance. Understand, however, that short selling isn't obtainable simply because a borrower is eager to sell his home. There must be a financial need to short sell a property, and lenders must view foreclosure as inevitable. Borrowers who might qualify include those who lose their jobs or income source and those who have missed one or more mortgage payments.
- Even if a lender qualifies a borrower for a short sale and agrees to forgive some of the mortgage balance, lenders don't usually disclose how much they're willing to forgive, which creates challenges when choosing a sale price. Buyers must submit a bid for the property, and the seller or seller's agent then presents this offer to the mortgage lender. Upon review, lenders then decide to accept the short sale offer or reject the offer.
- While forgiving some of the mortgage debt and allowing a short sale helps strapped borrowers, the possible tax consequences of forgiven debt can create an even larger financial burden. According to the IRS, any forgiven or settled debt is considered income. Regarding short selling or settling a mortgage debt, it's standard for borrowers to pay income tax on the forgiven amount. Fortunately for borrowers, the Mortgage Debt Relief Act of 2007 cancels any tax liability associated with short selling a property through 2012.
- Because short selling a house involves settling the mortgage debt, credit damage is customary. Debt settlements affect credit scores negatively because borrowers do not satisfy their financial obligations. Mortgage lenders report short sale properties as debt settlements on credit reports; and with a settlement, acquiring new loans can present challenges. The good news is that credit damage from a short sale isn't as serious as damage from a foreclosure, which equals a faster recovery time, says Fannie Mae.
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