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Have You Heard the Term Short Sale and You Are not Quite Sure What it is?

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By : marco benavides    99 or more times read
Even though the term has become more common as the recession has bottomed out and begun to pick back, there are still many people who hear someone mention a short sale but they are not quite sure what it is or what it may involve. It is not difficult to explain that a short sale is an agreement between the lender and the borrower to sell the property for less than what is owed on the loan, usually because the borrower has fallen upon economic and/or financial hardship and he/she is no longer able to meet mortgage loan obligations.

If you are a borrower considering a short sale, there are two things you must always keep in mind so that a short sale is truly beneficial to both parties. The first one is that there should be a clause in the agreement whereby the lender acquiesces to forgive what is owed on the mortgage once the proceeds from the short sale are turned over to the lender. The second one is that the lender will usually include a clause in the agreement in which it will reserve the right to approve or reject any short sale.

The lender is not out to do a good deed for the borrower and the borrower is not doing the lender any favors. Each party is actually looking out for his/her own interests and trying to allay any further losses or avoid the costs of foreclosure which can quite considerable. The borrower gets rid of some debt burden and takes less of a hit on a credit report. Even though the short sale entry will stay on the credit report for seven years, someone having gone through this process can usually take out another mortgage 1 to 3 years thereafter, but this will depend on what else there may be on the credit report that will negatively affect the borrower's credit rating.

So, although a short sale is rather simple to explain, the process can be extremely tricky, especially if there are other parties such as second and third mortgage holders and insurers involved. The IRS may be involved in the process too because the lender may report the portion of the debt it has forgiven as income, in which case you would owe taxes on that income. An insurer is sure to be involved if there is mortgage insurance because the bank will surely request for the insurer to cover the portion of the loan that it is going to forgive on the short sale. It may be that a short sale will not leave any money for second and third mortgage holders, so they may be more reluctant to allow a short sale, and they will probably not forgive what is owed to them.

When things get so intricate and involved, the best thing to do is to hire an expert in short sales so that the process has a better chance of being successful. The longer that the property remains unsold, the chances will be likelier for a foreclosure and the credit implications would be greater for the borrower. A professional can provide guidance during the proceedings to increase the likelihood of a sale.
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