With all the short sale information available all around the internet, it became very hard for a person from outside the real estate market to accurately define short sale. In order for us to get to a clear short sale definition, we need to completely understand what it’s all about. Let me give you an example:

Imagine that a person lives in a property that has a mortgage balance of $400.000. If the real value of the house is less than the actual mortgage balance (let’s say $300.000), then this person will be paying more than what the house worth. If the difference between the mortgage balance and the real house value isn’t big, then most people will keep paying the lender (most times it’s the bank) until they complete their mortgage. However, if the difference is too big; the property owner begins to consider what we call “A Short Sale”.

The right way to define short sale

A short sale happens when the mortgage balance is more than the actual property value in the market. If the homeowner isn’t able to afford any further mortgage payment; then s(he) might consider short selling the house in order to avoid foreclosure.

You now might be wondering about what happens to the amount left between the mortgage and the house value that your lender still owes you? Well, most of the times you can manage to get that remaining debt forgiven. However, you need to check with your bank first before you proceed with your short selling.

Are there any further short sale tax implications?

Unlucky for the short seller, the IRS considers the amount forgiven on your remaining mortgage balance as actual income and so it’s a subject of tax. However in 2007, George Bush passed the Mortgage Forgiveness Debt Relief Act which excludes you from paying taxes on that forgiven debt but only until the act ends on December 31, 2012.

After knowing the right way to define short sale, you need to check with your short sale agent if you are considering proceeding with it seriously.

I know that many of you have already heard about the term short sale, but probably very few know how does short sale work? In order for us to completely understand how it works, we need to get a clear definition first. A short sale happens when a property owner has a mortgage balance more than the actual property value. Let’s say that your house value in the market is $200.000. If your mortgage balance is above $200.000 ($300.000 for example), then you logically have to get rid of the house because you’re going to be paying more then what the house worth. If you happen to fall into this category, then short selling your house is probably your best way to avoid the devastating foreclosure penalties.

So how does short sale work?

Many people think that they will never get the bank approval on a short sale. If you think logically, then there is no reason for a lender (bank) to approve your short sale as they are going to lose the difference between the mortgage balance and the property value. In the previous example, the remaining balance is $100.000. So why would the bank approve your short sale?

As there are many unpleasant ramifications to foreclosure for the property owner, the bank will also get a hit from it as well. There is nothing the bank hates more than foreclosures. It’s true that if they find that your financial situation allows you to pay the mortgage left; they will not approve your short sale. However, if they find out that you’re not able to pay it, then why would they lead you to foreclosure when they can avoid it by short selling (I mean you’re not going to pay the mortgage anyway). But before you contact your bank, you need to see a short sale agent to discuss the tax implication for your short sale. When you find that it’s better to short sell, then you should proceed.

Short selling your house begins with you finding a good price depending on the market value. After that, you want to contact the lender and drop them a hardship letter that explains your financial situation and why you’re not able to pay the mortgage. After the bank approves your short sale, you need to close the sale as soon as possible. If you’re concerned about the remaining mortgage balance (forgiven debt), then I’m telling you that most banks forgive that remaining debt. However, you should check with the bank before you proceed.

After knowing how does short sale work, you can check on with your short sale agent to explain thing even further.

Writing a hardship letter for short sale is probably the most important factor in your entire procedure. Because the lender gives it too much weight, you really need to take care of it properly. If a short sale happens to be your last resort to avoid foreclosure, then taking time into writing a good hardship letter could make a huge difference in the bank approval process. A hardship letter is simply a letter that you write to your bank requesting short selling your property to avoid foreclosure. If you need to write a hardship letter for short sale, then you definitely need to follow these guidelines:

1- Be descriptive:

It’s true that you don’t want to annoy the loss mitigator by writing a long hard to read through letter. What you need to do instead is writing a very descriptive letter explaining your real situation. By descriptive I mean including dates, facts…etc.

2- Be honest:

The worst thing that you could do when writing a hardship letter for short sale is to lie. I don’t know why people are still doing it, but I know one thing. If you don’t be honest with your real situation, then you’ll never get the bank approval.

3- Don’t complain:

Complaining inside your letter will not get you any good. Some home owners try to over complain thinking that they’ll win the loss mitigator’s heart. If you do that, then you only end up upsetting him or her and the next thing you’ll see is the bank disapproval. Your letter should only contain facts about the reasons that made you default your loan.

4- Explain your hardship:

Whether you were in divorce, lost your job, ill or having a big credit card debt, you need to state it as your main reason of not being able to pay your mortgage. You also need to state that your financial situation isn’t going to get better in the next months and that’s why you’re considering a short sale.

5- Formatting:

Your hardship letter shouldn’t be longer than one page. Here is how it’s formatted:

• On top of your letter, write down the: bank name, their address and their phone and fax number.
• Skip a line and write your request: “RE: Request for short sale – (Your Property address).”
• In the first paragraph, you should state the financial problem that made you not able to afford your payments (state the reason of hardship).
• The 2^nd paragraph should describe how you exactly got into that situation like: stating that the taxes have increased, your income has desreased…etc.
• In the last paragraph you should clearly state that you’ll not be able to pay your mortgage and that you need a short sale. You should leave your phone number or any contact info in order for the loss mitigator to be able to contact you if s(he) needs further information.

By following these steps, you’ll be able to write and effective hardship letter for short sale that the bank will approve very easily.

Short selling your house could sometimes be your best solution to avoid foreclosure. If you happen to have a mortgage balance that is greater than the house value itself, then you properly need to consider short selling it. The reason behind foreclosure being too scary to most people isn’t the fact that the lender (bank) will repossess their properties, but rather many other related and inevitable consequences. The worst consequence of foreclosure is the credit fallout. As credit cards also have a default rate, you’ll have a hard time getting other loans in the future. If you want to get another mortgage after foreclosure, then you probably need to wait about 5 years to get one. In order for you to avoid these devastating penalties, here are 7 steps to short sell your house:

1- Checking tax implications:

The first thing you need to do before you consider short selling your house is to check if you’ll be a subject of short sale tax implications. With the Mortgage Forgiveness Debt Relief Act valid until December 13, 2012, you’ll get your tax forgiven by the IRS for properties that have a debt of up to $2 million.

2- Check for the remaining balance:

There are some lenders that will forgive the remaining balance between your mortgage and the actual house value, but there are other ones that don’t. To stay safe, you need to check with your bank before you consider short selling.

3- Check the market value:

If you decide to go for a short sale, then you definitely need to check the market value yourself, or ask for an estimation from a short sale agent. Going through this step will make your calculations more accurate.

4- Check with your short sale agent:

As you can do this on your own, I advise you to seek help from a professional short sale agent. An expert agent could get your short sale approved by the bank easily. Instead of checking and going through the complete procedure of short selling, your agent will take care of everything for you.

5- Write a good hardship letter:

Many people try to play smart with the hardship letter to realize that their request has been denied by the lender. If you want to get your short sale approved by the bank, you need to be as honest as possible about the reasons that prevented you from paying the mortgage. If you lost your job, ill, experiencing divorce…etc, make sure to include these in your letter.

6- Get lender approval:

If everything is good, you’ll get a pre-approval of your short sale waiting to get final approval. When the bank decides that it’s good for both sides to short sell, then you’ll get notified with the final approval so you can proceed with the sale.

7- Close the sale:

After you get the final approval of the bank, you need to close the deal and sell the property. If you’ve done your home work before short selling the property, then you’ll never face any unwanted accidents.