There are several means to lose a home but passing away rights in a way that destroys credit, humiliates the family and strips an owner of self-respect is one of the toughest. For landlords who can no more afford to keep mortgage payments up-to-date, there are options for insolvency or foreclosure proceedings? One of those alternatives is known as "short sale."

When financiers agree to do a short sale in real estate, it means the financier is agreeing to accept less than the total amount due. Not all financiers will agree to short sales or discounted payoffs, mostly if it would make more financial wisdom to foreclose; besides, not all sellers or all properties are eligible for short sales.

If you are thinking about buying a short sale, there could be downsides. For your security, I recommend that all borrowers:

  • Get legal advice from a knowledgeable real estate lawyer
  • Call an accountant to deliberate short sale tax consequences                

As a real estate agent, I am not licensed as a lawyer or a CPA and can’t guide on those penalties. Save for certain circumstances pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, know that the I.R.S. will regard debt forgiveness as income, and there is no assurance that a lender who agrees to a short sale will not lawfully pursue a debtor for the difference between the amount paid and the amount owed. In some states, this amount is called a deficiency. A lawyer can regulate whether your loan is eligible for a deficiency claim or judgment.

Though all lenders have different requirements and may request that a borrower submit a wide array of papers, the following steps will give you a very good idea of what to expect.

Call the Lender 

You may have to make half dozen phone calls before you see the person in charge of handling short sales. You do not want to discuss the "real estate short sale" or "work out" department; you want the supervisor's name, the name of the person responsible for decision making.

Submit Letter of Authorization

Lenders normally do not want to reveal any of your personal information without written authorization to do so. In case you are working with a real estate agent, Title Company, closing agent or lawyer, you will get good support if you write a letter to the lender permitting the lender to talk with those specific interested parties concerning your loan. The letter should contain the following:

  • Property Address.
  • Loan Reference Number
  • The Date
  • Your Name
  • Your Agent's Name and Contact Information

Preliminary Net Sheet

This is a predictable closing statement that shows the sales price you hope to get and all the costs of sale, unpaid loan balances, unsettled payments due and late fees, including real estate fees if there is any. Your closing lawyer or agent should be able to organize this for you, in case you do not know how to compute any of these fees. If the bottom line shows cash to the seller, you will possibly not need a short sale.

Hardship Letter

The sadder, the better! This statement of facts explains how you got into this financial predicament and makes an appeal to the lender to take less than full payment. Lenders are not cold-hearted and can understand if you lost your job, were hospitalized or a truck ran over your whole family, but financiers are not mostly sympathetic to circumstances relating dishonesty or criminal behavior.

Proof of Income and Assets

It is best, to be honest, and truthful about your financial condition and reveal assets. Lenders will want to know if you have money market accounts, savings accounts, negotiable instruments, stocks or bonds, cash or other real estate or anything of real value. Lenders are not in the business of charity and always require assurance that the debtor can't pay back any of the debt that it is forgiving.

Copies of Bank Statements

If your bank statements show unexplainable deposits, huge cash withdrawals or a rare number of checks, it's probably a good idea to explain each of those line items to the lender. Additionally, the lender might want you to account for each and every deposit so it can decide whether deposits will continue.

Comparative Market Analysis

Occasionally markets drop and property values decrease. If this is part of the reason that you cannot sell your home for enough to pay off the lender, this point should be validated for the lender through a comparative market analysis (CMA). Your real estate agent can make a CMA for you, which will show prices of related homes:

  • Active on the market
  • Sales from the past six months.
  • Pending sales

Purchase Agreement AND Listing Agreement

When you reach an agreement to sell with a potential purchaser, the lender will require a copy of the deal, along with a copy of your agreement of listing. Be ready for the lender to negotiate commissions again and to decline to let payment of certain items like home protection plans or termite inspections.