Real estate has a plethora of intricate home-selling processes. One frequently mentioned but rarely understood is called a “short sale,” which occurs when a lender agrees to write off the portion of a mortgage that’s higher than the value of a home. So what exactly is a short sale and how does it work?

What is a Short Sale?

This is a complicated process and a lot will depend on the lender. Usually, a buyer must be willing to purchase the property first. A short sale may be more complicated if the loan has been sold in the secondary market. Then the lender will need permission from Freddie Mac or Fannie Mae, the two major secondary-market players.

If the loan was a low down-payment mortgage with private mortgage insurance, the lender also will need to involve the mortgage insurance company that insured the low down payment loan.

Advantages and Disadvantages of a Short Sale

The short sale can keep the homeowner from landing in bankruptcy or foreclosure. But it is not an easy procedure to approve, and it involves as much, if not more, paperwork than an original mortgage application.

The difference with a short sale is that instead of proving your credit-worthiness and financial stability, you must prove you are broke. And any remaining difference between your home’s value and the balance on your mortgage is considered a forgiveness of debt, which usually means it is taxable income.

Want to Learn More About Short Sales in Bethesda?

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