A short sale, in real estate, is when the mortgage lender agrees to settle a mortgage for less than is owned on the property. In today’s market of dramatically falling housing prices, a homeowner may find his house is worth less than he owes on the property. Such situations, combined with escalating adjustable mortgage payments, have made short sales much more common than ever before. Short sales are expectedly to reach record levels in 2008. Some basic facts about short sales:

  • Generally, the homeowner must be in default before the lender will consider a short sale.
  • Short sales differ from foreclosure in that the bank agrees to not pursue the borrower for the difference between the sale price and the amount owed on the mortgage.
  • A short sale is not a credit saver. Any money a lender “writes off” will be reported as income on a 1099 form to the IRS and the write off will remain on a borrower’s credit report for at least seven years.
  • Short sales are not a way for investors to buy a house under market value. For a short sale to be approved by the lender, the seller has to prove that they could not sell the house for more (using comparable house sales, time on the market, and other factors).