Short Sale Pros & Cons

The short sale option can help a troubled homeowner but does carry some risks. A short sale is when a troubled borrower is able to sell his home for more than the money owed on the mortgage. The lender must agree to the short sale, and the remaining debt on the loan is generally forgiven after the home is sold.

Foreclosure Avoidance

A short sale allows the homeowner to avoid foreclosure, the legal process used by lenders to enforce payment of a mortgage debt. The homeowner has to move out of the house before the public foreclosure auction. A short sale gives the owner more time to sell the house and find a new place to live.

Financial Impact

Lenders can obtain deficiency judgments after a short sale in some states. A deficiency judgment is a monetary court award for the lender against the former homeowner. The lien amount is determined by the difference between the balance of the mortgage loan and the price the home sold for. The borrower can also be liable for taxes, per the IRS, on the amount of the mortgage balance the lender forgave in the sale.

Credit History

Foreclosures and short sales are both damaging to the borrower's credit history, but a short sale can have a lesser negative impact if reported to the bureau properly, according to Maxine Sweet, public educator for Experian. The homeowner can ask for a clause in the short sale contract that stipulates the lender will not report the short sale as a charged-off account to the credit bureaus.

Selling Obligations

The homeowner has to list the home for sale and find a buyer to do a short sale. Some lenders require a real estate agent be used in the sale. The short sale application involves the seller providing the lender with solid documentation, such as the borrower's pay stubs and proof of hardship. A seller with a high-paying job or assets may have a harder time doing a short sale with the lender.

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