Short Sale is a Dangerous Sale

The main topic of discussion with real estate professionals and consumers is the "short sale" where a lender agrees to take less than the agreed principal and interest due on a note. Some times there is a sale in process, some times a deed in lieu of foreclosure.

I have heard rumors that lenders are forgiving a set percentage of loans and that this short sale will not hurt one's credit.

There is no standard for a short sale. Lenders have to make hard business decisions based on the information they have. Be assured that every short sale is examined extensively before it agreed to and the lender is acting in its own best interest, not the borrowers.

Any time a lender, whether bank, credit card company, or mortgage holder accepts less that the amount due, the borrower will have negative consequences for the borrowers credit profile. The one situation I have heard with less damage is where the short sale agreement stated the short sale would not reflect on a credit report. This is negotiated, not automatic. In exchange, the lender wants a deficiency note. The deficiency note is where the borrower agrees to make the lender whole over time. Even though the lender does not have a lien securing the loan, the borrowers credit is only as good as the last on time payment.

One last piece often over looked is the tax consequence of a short sale. If a lender settles for less than agreed, that deficiency is treated as income to the borrower. The borrower will have to pay income tax on the money not repaid.

If you are contemplating a short sale, get a good lawyer. It will be money well spent.

MMM