A “short sale” is when you sell your house at a price that is lower than the balance you owe on your house. Because the proceeds from the sale of your house falls short of the principle balance you owe the bank, it is referred to as a “Short Sale”. This type of sale occurs when a homeowner cannot afford the mortgage payments and the value of the property drops so that the homeowner cannot refinance his home. The Bank decides that selling the property at a loss is better than forcing you into foreclosure.
The Banks have loss mitigation departments that will look at each deal and decide if the bank will agree to a short sale. Each Bank will have their own requirements for approving a short sale. Typically a Bank will have the home appraised and based on that appraisal they will decide if it is better to have you sell the home for less than you owe or if they will make more money foreclosing on you and then selling the house themselves.
If the Bank does agree to the short sale you are still not out of the woods. You will still be responsible for the difference between the short sale proceeds and the remaining balance of your mortgage unless you have it clearly stated in the agreement that you are not responsible for any remaining balances. Even after you get the Bank to forgive the debt you sill have to deal with the Internal Revenue Service (IRS). When you have any debt “forgiven” the IRS considers it to be income. So while you are losing you house because you can’t afford to make the payments the government expects you to pay taxes on the gains you receive. You should always ask a tax professional what the impact of the Short Sale will have on your personal income taxes since there are some exclusions that have recently been put into effect.
Hopefully, the goal of making the definitions of a Short Sale Simple has been achieved. You should seek the services of a licensed real estate professional that specializes in Short Sales before you contact the bank. These Professionals can negotiate with the Bank for you. Also remember to consult with a tax specialist before signing any agreement.