Definition
A short sale is a sale of real property for less than what is owed on the mortgage.
Analysis
Some lenders will agree to a short sale if they believe that the expected losses will be lower than if they go through the entire foreclosure process. They can save legal fees, listing fees, and filing fees, and they can collect on the lump sum immediately rather than waiting for the property to sell.
A short sale can benefit a distressed homeowner by alleviating the financial burden of the mortgage payments, late payments, late fees and any deficient balance that may be forgiven by the lender. Additionally, the homeowner can avoid having a foreclosure show up on their credit report.
A short sale is a type of pre-foreclosure sale, in which the home is sold in order to avoid foreclosure. A short sale is typically preferred over a deed-in-lieu of foreclosure, in which the lender would still have the burden of selling the property.
Any forgiven debt is automatically reported to the Internal Revenue Service as a form of income on Form 1099-C. Some consumers may be able to avoid paying taxes on forgiven debt if they are insolvent. Additionally, Congress allowed for a break in this penalty for years 2007-2009, as long as the forgiven debt resulted from a primary residence.
