During the short sale process, the borrower and lender must come to an agreement to sell the property at a price that is lower than the outstanding loan amount that is owed by the borrower. A real estate agent works for the seller to both negotiate with the bank on an agreeable sale price and find a buyer that is willing to weather a process that can be long and difficult to complete. Buyers typically like short sales due to the fact they can get a better price on the home than what it typically might cost.

As mentioned, the short sale process can be lengthy. Negotiations must be done with the bank and they must agree that the property should be sold for less than what is owed on the loan.

A real estate agent or loss mitigation expert should prove valuable during the process. There will be more paperwork than usual and the bank will require the homeowner to document income and expenses to make sure a short sale is an appropriate solution. A hardship letter will also be required to document why the borrower is unable to meet the existing loan obligations.

If done correctly, it is a victory for all parties involved. The seller gets out from under an unaffordable loan, the buyer gets a better deal and the bank is able to maximize recovery of their losses. Furthermore, for the seller, they minimize damage to their credit and will be able to recover faster than if they chose to go through with the foreclosure process.

Many homeowners don’t understand the difference and therefore don’t know if they should let the foreclosure happen or if a short sale is better. This ultimately leaves the lender with all the leverage and puts the homeowner’s fate in someone else’s hands.

It’s important to know all the consequences of both options in order to make an informed decision about whether or not to go with a short sale or foreclosure. Of course, we could simply say to always pursue anything that avoids foreclosure as that is often the worst result, but that’s too easy. Let’s look a little deeper.

Advantages of Letting the Bank Foreclose

• You don’t have to do anything. This method does not require you to take any action. Some people actually prefer to walk away which brings us to…
• …Cash For Keys. Because of the hard feelings created by a foreclosure, some people choose to trash the home on their way out. Lenders often offer a cash for keys program that pays the leaving homeowner for keeping the home intact. If you’re going to foreclose, you might as well check into whether or not the lender will pay you cash.

Advantages of Short Sale

• Results in less damage to your credit both short term and long term
• Reduces the chances your lender will pursue you for a deficiency judgment
• Allows you to purchase another property sooner (after 2 years)

Make no mistake, the short sale is a better option and we could probably list more reasons to support that statement.

In addition to the positive aspects of a short sale, the list of disadvantages on a foreclosure is quite long. It remains as public record for the next 7 to 10 years, it affects the credit report, any future purchase, your ability to get other loans, current or future employment  and more.

Short sale or foreclosure? The answer is pretty simple. Walking away should only be a last resort.

A short sale negotiation needs to involve both a real estate agent and negotiation specialist. A specialist is often someone from a legal firm or other third party loss mitigation company.

The reason for this negotiator is that banks are often difficult to deal with. Some people might choose to deal directly with the bank themselves, but in a process as complicated as a short sale, it’s best to enlist professional help.

If you do try to work directly with the bank on your own, be sure to always remain calm and confident. It’s very easy to get frustrated. Banks are very good at telling you no.

One of the most important parts of the short sale negotiation is the package you and your loss mitigation specialist put together for the bank.

Make sure the package includes all the materials the bank has requested. This often includes a hardship letter from the homeowner or owners, estimated value of the property, estimates for any needed repairs of the property, homeowner’s income tax return documents and a borrower’s offer price for selling the property.

After verifying all the documents, the most time consuming part is negotiating the price for the home to be sold. The bank will obviously look for more profit and may not always agree to the price offered by the borrower. This is a critical part for you to have representation. Banks deal with individual homeowners differently and try to get as much out of them as possible. A negotiator is going to have a better idea of what is really possible and should be able to get a fair agreement just about every time.

Short sales are a lengthy process and the negotiation can drive you positively crazy. Let someone else handle it and keep your stress to a minimum.

Here are two options for finding short sale help:

• Professional Loss Mitigation Specialists. You may contact a loss mitigation office and hire legal professionals to take care of the short sale procedure. Make sure that the loss mitigation company has a good reputation and is already established in this kind of business. Again, you want experience in these situations. A good loss mitigation firm can also recommend a short sale real estate agent that has familiarity with this type of transaction.
• Real Estate Agent. Realtors are a great resource and you’ll definitely need one to sell your home. But you don’t want just any realtor working your short sale. This has to be someone with verified experience selling homes that require bank approval of a sale price that is less than what is owed on the mortgage. A good agent will probably have a person or business that is adept at handling the lender negotiation aspect of the sale. Short sales are difficult to do and time consuming for just one agent.

Whatever you do, don’t attempt to do a short sale without help. Typical real estate transactions are already tough enough. Throw in the extra hassle of a short sale and it’s an extremely difficult process.

Even with help, you’ll need to prepare for a long drawn-out process involving back and forth negotiations with the lender. Just because you have a buyer at an agreed upon price does not mean the sale will go through. The bank must approve all short sale deals. Enlisting the help of an experienced firm, agent or both will help smooth out that process.

There are probably millions of properties now in the U.S where the home is actually worth less than what is owed on the mortgage. In these situations, lenders are usually willing to accept less than the full amount due to avoid a foreclosure process.

Negotiating a short sale with the lender is a difficult and lengthy process. However, from a lender’s perspective, compared to foreclosure, short sales save many of the costs associated with the foreclosure process. Attorney fee’s, the eviction process, delays from borrower bankruptcy, damage to the property, costs associated with resale, etc. can all be avoided or diminished with a short sale. The lender also has a chance to consider competing offers which may drive the price up and diminish losses. It’s important for everyone in the process to have patience and understand that the outcome of a short sale is in everyone’s best interest.

A borrower should maintain patience knowing full well that a foreclosure carries far more negative consequences. Because all foreclosure transactions become public record, the borrower could end up with a negative public perception. The effect of foreclosure remains public record for 7 to 10 years. That’s a long time to wait for a record to clear. During this time, it will be almost impossible to purchase a home again and there are even cases where employment can be affected by a publicly know foreclosure.

However, the seller should be aware of the short sale taxes associated with the process which are largely unavoidable.

The phenomenon of short sale is mainly and largely governed by the Mortgage Forgiveness Debt Relief Act of 2007 and Emergency Economic Stabilization Act of 2008. After the short sale proceedings, the lender is left with a deficit that has been unpaid by the borrower or through the home sale. The lender generates a form which is termed 1099-C Tax Form, in order to officially communicate to the borrower that the deficit or the remaining amount of the loan has been written off and the debt has been discharged. Previously before passing the Mortgage Forgiveness Debt Relief Act, this written off amount was being included by the IRS in borrower’s taxable income. In the year 2007, the Mortgage Forgiveness Debt Relief Act was passed which made provisions for short sellers to exclude the forgiven amount (deficit) from taxable income and this provision will exist until 2012. Otherwise, conventionally, the short sale taxes are paid in proportion to the time period for which the seller owned the property.

We’ve only scratched the surface in regards to short sale taxes. To really understand how your taxes can be affected, you should consult a tax attorney to be sure about the tax provisions that may be applicable.

• Credit Score – Short sales do not generally show up under public records and if the short sale is completed successfully, then credit will only show the late payments to the mortgage and the statement “settled for less than full amount due.” Depending on the rest of the credit, the score may only be affected by as little as 50 to 60 points. Foreclosures are public records somewhat like bankruptcy and lower the credit score by almost 175 to 300 points.
• Credit History – Once the ‘short sale’ is closed and the deal is done, the record is generally closed. But foreclosure will remain as a public record on your credit history for 7 to 10 years. Consider that many employers pull your credit as a means to find ways to weed out competition for a position.
• Future Property Purchase – If an individual completes a short sale he/she will be able to purchase a property after 2 years (time period may vary  depending on the credit score). Individuals losing a home to foreclosure will not be eligible for purchasing any property for the next 5 to 7 years.
• Taxes – In both cases at the end of the year the lender will provide a 1099-A (foreclosure) or 1099- C (short sale) which reflects the amount they have written off.  This will show as income to the homeowner who may or may not be responsible for paying taxes on this income. Insolvency may be an option for this.
• Employment – There is no effect of ‘short sale’ on current or future employment of the seller. But foreclosure may create a problem (even termination) in current as well as future employment due to it being a matter of public record.
• Security Clearances – Mostly, short sales do not challenge any security clearances. But foreclosure can be a problem for a security clearance. See this article at armytimes.com for more.

As you can see, it pretty much benefits you in every way to pursue a short sale when the only alternative is foreclosure.

A typical short sale will probably require two experienced parties to effectively get the job done.

1. Real estate agent. Preferably, you want someone who has a history of successful short sales.
2. Short sale negotiator. This person handles the direct contact with the lender and negotiates the sale price down from what the lender might ask.

Some agents might take the negotiation role on themselves, but that can be pretty daunting so make sure they have a successful history before contracting for their services.

There are multiple parties involved beyond those representing you and that’s a big reason why you want to enlist professional help.

The process may require approval from junior lien-holders, HELOC lenders, special assessment liens, etc. Tax lien holders and mechanic’s lien holders appear as potential objectors of the approval process. They may prevent the short sale. So, the involvement of a wide array of parties, parameters and processes in a short sale makes it very complex and difficult.

You can see why a short sale specialist could be so important. It’s very frustrating to get a buyer and seller on the same page only to have the bank or perhaps an additional lien holder object.

The possibility of success in a short sale agreement depends on choosing a good short sale specialist.

That’s where a short sale becomes the most viable option. But what is a short sale and how does it solve a loan repayment problem?

Simply put, a short sale is the process of selling one’s home for less than what is owed on the mortgage. If you can’t keep your home and you want to avoid the public procedure of a foreclosure, this is the best way to go.

The benefits look something like this:

• You are free of a huge debt that you probably were unable to ever pay back.
• You avoid the foreclosure process which is in the public domain
• Supposedly, your credit takes less of a hit than with a foreclosure
• You get to start over! You have to admit, a home loan that is more than the home is worth by a significant amount is stressful. Just having it over with will lift a huge weight from your daily life.

The process of completing a short sale is not simple. It takes time – a lot of it in most cases. The bank wants to avoid the foreclosure process above all else so they will be on board with a reasonable short sale request. But the amount you sell the home for short of what you owe will be intensely reviewed and all sales must be approved by the bank before the transaction can go through.

This means you and a buyer may fully agree to a sale only to have the bank step in and reject it. Select a real estate agent that is well-versed in the short sale market to help you during this process. They should have also have someone who can handle negotiations with the bank.

The popularity of short sales is owed to the fact that it lets owners get out from under the giant rock that is a house with a fast-declining value.

It hasn’t been unheard of to see homes once valued at $500,000 plummet to, say, $200,000. When the owner is left with a mortgage of $450,000 and a home value of $200,000, it’s obviously a big problem.

Refinancing is impossible. So is selling the home unless one manages to come up with the hefty sum of cash still owed on the loan.

Enter the Short Sale

Banks have no choice but to acknowledge that the home value’s decline is a problem that can’t be remedied and, as such, they are inclined to work with owners to remedy the situation. They will often approve the home to be sold at a price lower than what is actually owed on the loan. In other words, the owner can sell it “short” of what he or she actually owes.

A short sale can get you free of a loan that is otherwise impossible to pay back.

Of course, the process doesn’t come easily. You may have a buyer for what the home is currently worth,  but the banks don’t just say, “ok, we’re all square.” They want to maximize their return and will often counter with a different price. The process can drag on for months.

Employing skilled agents and negotiators is critical to your success in a short sale. With good people and a little patience, the process will work itself out and you can be free of a burdensome loan.