How To Stop a Foreclosure via a Short Sale

For distressed homeowners facing foreclosure one possible option is the short sale. Selling a home in a short sale is a legitimate method for stopping the foreclosure process, allowing the homeowner to get on with life and without the ding to the credit record.

The Mechanics of a Short Sale

What’s the catch?

By definition a short sale is literally the sale of a home for less money than is currently owed the lender on the outstanding mortgage being foreclosed on. In other words the home is “upside down” from a financial aspect. Therefore, the “catch” is that in order to successfully conduct a short sale, the foreclosing lender has to agree to it, essentially agreeing to accept less money than it is owed on the loan secured by the house.

A short sale is not a vehicle normally seen during a seller’s market when multiple offers are lining up at the door competing with each other for the house. Short sales are most widely accepted during a buyer’s market when home sales are dragging, home values are declining, and inventories of available properties are growing to the point that the lender basically is just throwing up its hands and saying some money for the house is better than no money at all.

Lenders are not in the business of owning real estate. They get upset when they have too many properties on their REO (real estate-owned) books instead of out in the market making it a profit through monthly mortgage payments. Plus, the foreclosure process is not free. Every house they foreclose on costs them thousands of dollars. So, in some instances, agreeing to a short sale is in the lender’s best interest.

Homeowner’s Role and Strategies

It is up to the homeowner to convince the lender that this is one of those circumstances where it’s better to fish and cut bait. It’s a matter of numbers and economics. The homeowner needs to demonstrate to the lender hard numbers that will lead the lender to conclude that selling via a short sale is going to benefit them more than the amount they would garner from foreclosing on the property and then selling it as an REO.

Keep in mind there is one major downside to a short sale, however. As much as the lender wants to keep the property off its books, it also wants the money it’s owed. In many situations the lender will make it a condition of agreeing to a short sale that the homeowner sign a promissory note to make up all or part of the difference between the proceeds from the short sale and the amount owed on the original debt.

Also, an important aspect most homeowners don’t realize when they decide to go the short sale route, is that any amount of the debt that the lender forgives is considered to be taxable income by the Internal Revenue Service.

The lender must submit a form to the IRS stating the amount of debt forgiven, so the tax man can be waiting for the homeowner when April 15 rolls around next year —if any of the debt was indeed forgiven.

So for homeowners looking at all their options to stop foreclosure and save their home, the first step should be to contact their lender right away to try and negotiate a workout plan to temporarily lower payments, or to refinance to a fixed-rate loan.

Seeking Professional Help

After those and all other options have been exhausted, the next step might be attempting to get the lender to agree to a short sale. If so, then before going too far it is advisable to seek the assistance of a real estate professional who is well versed in short sales. Not all real estate brokers or sales agents know how to conduct a short sale or how to work with lenders in negotiating one.

Bottom line: don’t be afraid to ask a real estate professional if he or she has any experience working short sales. If not, move on and interview until you find one who has. Possessing a real estate license does not make them an automatic expert in short sales. It calls for extra training not all real estate professionals have.

Remember: you are paying them to represent your interests and you want the most qualified representation possible when it comes to stopping foreclosure and saving your home.