The Long And Short Of Short Sales

Short Sale; The sale of a home where the sale or list price price of the home is less than what is owed on the mortgage.

If you have bought a home in the last five years with no money down or if you have maxed out your home equity lines of credit, chances are you are 'upside down' on your mortgage. Being 'upside down' means you owe more to the bank than what the home is worth in todays depressed marketplace.

What does this mean for a homeowner in this predicament? Well, it you need to sell your home, chances are you are going to have to do a 'short sale' transaction. But how do you make up the difference between what you owe and what your property is worth, (plus closing costs and agent commissions).

Ideally, you bring a big fat check from your savings to the closing table to pay off the balance of the mortgage which is not satisfied by the sale of the property.

Realistically you go to your lender and request that they 'forgive' the balance of the loan. But a lender will only consider this option under dire financial circumstances when the only other avenue would be foreclosure.

Are short sales easy? No, they are not. Edina Realty estimates that only 1 out of 3 short sales actually close with the the rest either sliding into foreclosure or the homeowners pull their home off the market and wait for better days.

The good news about short sales is the IRS will not tax you on the 'capital gains' which occur when the bank forgives the balance of the loan. In the past if the bank forgave $20,000, the IRS treated the money as income and taxed you accordingly.

The bad news is a short sale can ding your credit, which potentially can make it difficult to buy a home in the future, obtain credit cards, rent an apartment or even buy automobile insurance.

In short, if you are upside down on your mortgage, it's best to wait out the storm until the housing market stabilizes and homes begin to (hopefully) increase in value. Ask your lender if it's possible to change the terms of your mortgage (lower interest rate, longer mortgage). This may help to lower your payments and keep you afloat until the market makes a correction.