Real Estate Report: The Ins and Outs of a Short Sale

You've probably heard the term "short sale" by now—a short sale is the phrase used when a homeowner is selling their home, but the list price and/or sale price is less than what is owed on the property. This can also be referred to as being "underwater" or 'upside down' on a home loan. In a short sale, a lender agrees to accept less than the mortgage amount owed by the current homeowner. In some cases, the difference is forgiven by the lender, and in others, the homeowner must make arrangements with the lender to settle the remainder of the debt.

If you’ve attempted to modify your existing loan, feel that you cannot afford your payment even after a modification, or if you are forced to move due to relocation or divorce, a short sale may be your best option. But there are some key questions to ask before deciding to pursue selling a home in a short sale.

Although a short sale is not as detrimental to a person's credit as a foreclosure, there is a negative mark placed on a credit report once the short sale is complete. The credit report will read, "paid in full for less than the full balance."

So, how do you decide if you should pursue selling your home in a short sale? A good online resource to visit is makinghomeaffordable.gov. This government website was created to summarize homeowner options under the federal government’s new Making Home Affordable program. The newer piece to this program that focuses on short sales (or a deed in lieu of foreclosure if attempts at a short sale are unsuccessful) is called the Home Affordable Foreclosure Alternatives Program (HAFA). Under HAFA, if you can answer "Yes" to the following questions, you may qualify for a short sale:

· Is the home your principal residence?

· Was your loan originated before 2009?

· Do you owe more than your home is worth?

· Is your mortgage delinquent or is default reasonably foreseeable due to a hardship such as job loss, medical or divorce?

· Is your unpaid principal balance no more than $729,750?

· Does your total monthly payment exceed 31% of gross income?

Under HAFA, after a short sale or deed-in-lieu is successfully completed, a homeowner is cleared of all remaining debt and obligations on their first lien mortgage to their mortgage servicer, and is eligible for $3,000 to help with moving expenses. In addition, the Mortgage Debt Relief Act of 2007, allows taxpayers to exclude income from the discharge of debt on their principal residence through the year 2012.

Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.