Mortgage Short Sale: Tips for Buying and Selling

Today, with the real estate industry trying to recover from the shambles it was in a year or so ago, it’s no surprise that the mortgage short sale is more the norm than the anomaly. For those who are in the dark, this process is a face-saving measure for homeowners who owe more in terms of mortgage than their home is now worth, who are unable to meet mortgage payments on their home, and in danger of foreclosure.

When you choose to short sell your home, your lender is in essence forgiving a part of your loan; a buyer who is willing to pay the amount the lender sets is found, and your home goes from your hands to theirs.

The mortgage short sale is a win-win situation for all concerned – the buyer gets a home at a reduced price; the lender, while losing out on some money, gains because they are spared going through the long, drawn-out and expensive process of foreclosure and then having to find a buyer for the home; and you as the seller are saved the embarrassment and humiliation that comes with having your home foreclosed.

Short sales are not for everyone, so whether you’re a seller or buyer, here are a few points you need to know before becoming involved in one.

Mortgage Short Sale Tips for Sellers

Mortgage Short Sale For Sale Signs

Too Many For Sale Signs?

  • Ensure that you qualify for a short sale first.
  • Talk to a real estate lawyer so you understand what you’re in for.
  • You can begin a short sale even before you’re in default if the current value of your home is less than the amount you owe.
  • Remember that a short sale can be initiated even a few minutes before your home is up for a foreclosure auction.
  • Check if you should do a short sale through a preliminary net sheet – this estimated closing statement tells you whether a short sale is a good idea or not by taking into account the unpaid loan balance, outstanding payments, late fees, cost of the sale, real estate commissions, and other costs. If you as a seller are left with some cash at the end of the calculations, then it’s not wise to sell.
  • If you have a second mortgage on your home, you cannot sell short without dealing with it first – if the lender is the same, maybe the short sale proceeds can be distributed over both mortgages; if it’s a different lender, you could buy out your loan without paying any interest you owe if the lender is agreeable (most of them agree to avoid a total loss), or if cash is a problem, you could ask them to release the loan after signing a note for the repayment of a percentage of the loan. Either way, the second mortgage has to be addressed before you do a short sale.
  • Lenders may not allow you to do a short sale if you’ve neglected paying your mortgage to finance other assets or if you’ve spent money indiscriminately.
  • You will have to provide a detailed copy of your list of assets and liabilities and your bank statements.
  • Any large withdrawal in cash is likely to be questioned by your lender to check if you’re scamming them into a short sale for any reason.
  • Your debt forgiveness is taxable, so you may incur tax on the amount you owe your lender but are not paying because of the short sale. So talk to your accountant or a real estate lawyer to work out the amount of tax you owe and if it’s worth it.
  • Your credit report will be affected if you go through a short sale – while it’s not as bad as a foreclosure record, it will show a pre-foreclosure that has been redeemed.
  • Remember that a short sale can only go through if you have a buyer willing to take your house off the market. The buyer and the lender must agree on all terms and be in agreement for your short sale to be completed without a hitch.
  • And finally, your lender can pursue you for the amount that you still technically owe them if it is allowed by state law. So before you sell short, get a written agreement from them that your debt is forgiven and that you don’t have to pay back the amount you owe on your mortgage.

For more seller tips, check out this video from the Dave Ramsey show…

And here’s part 2..

Mortgage Short Sale Tips for Buyers

  • Ensure that you go through a trusted real estate agent so that you don’t get scammed or cheated.
  • Never pay the seller outside of closing – not only is it illegal, you also set yourself up for additional tax liabilities by doing so.
  • Ensure that there are no liabilities on the home; a second mortgage that is outstanding and hasn’t been dealt with should be taken care of by the seller before you close the sale.
  • Before you decide to buy, check public records to find out who owns the title to the home, whether a foreclosure notice has been filed, and how much the seller owes to the bank. This helps you decide how much to offer and how high a price you should pay.
  • If you need financing, be sure to check current mortgage rates and find a solid lender.
  • You may have negotiated terms with the seller; even so, unless the lender too is in complete agreement, problems may keep coming up during the sale. In a short sale, the lender takes over the role of the seller, so they are responsible for agent commissions and other costs associated with the seller in a real estate deal. The lender may refuse to pay your pre-decided agent commission, in which case you may have to pay the difference out of your pocket. They may also refuse to pay for termite inspections, home insurance, minor repairs and other buyer credits. So be prepared for further negotiation to get all these included in the terms of sale.
  • Don’t buy a home without having it inspected first for pests and other maintenance faults.
  • And finally, remember that while a short sale could close in as little as 30 days or less, the majority of these transactions take months, even up to six, to close. So if you’re really interested in the home, do your homework and be prepared to wait it out.

This guest post is contributed by Omar Adams, he writes on the topic of online accounting degree. He welcomes your comments at his email id:
Photo by TheTruthAbout…

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About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon. He created this website back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence. He uses Personal Capital to track his wealth. All the content on this blog is original and created or edited by PT.


  1. Good article. Short selling is everywhere at the moment. Another article that I felt was good is worth reading as well. Explains it for the newbies…


  2. Good article. Short selling is everywhere at the moment. Another article that I felt was good is worth reading as well. Explains it for the newbies…


  3. Good article. Short selling is everywhere at the moment. Another article that I felt was good is worth reading as well. Explains it for the newbies…


  4. We’re going through a short sale right now, dealing with both the seller and the bank can make it a challenging process.

    Also, thanks for pointing out my post on finding a real estate agent, it’s actually very appropriate. Our agent has been a huge help navigating the short sale process, I don’t think we’d have gotten as far as we have without him.