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The Principles of a Short Sale? 

A lot of people buy houses with the intention of making it their home for the rest of their lives, but unexpected situations occur where homeowners have no choice but to move.

Homeowners forced to move due to some unforeseen or unexpected events, like job relocation or reassignment, divorce, death, or maybe financial difficulties.

When these things happen, they will have to put their home in the market so they can move. Before, selling your house was not really a problem, but with the home values dropping, it has become a problem for a lot of people.

Home values have been dropping in some regions over the past year. It has dropped low enough that many homeowners cannot profit sufficiently to payoff the mortgage as well as cover the closing costs.

There are many things that could happen as a result of this; Default, bankruptcy, or foreclosure. All of which will have a negative impact on your credit rating for a long time.

Depending on your outstanding mortgage, the best alternative that has a significantly lower negative impact on your credit would be a short sale.

What is a short sale? A short sale is when the lender forgives a portion of your mortgage and accepts a lesser amount than your loan balance.

Typically, banks or lenders would not want to do that, but the foreclosure is often a long and expensive process. Banks are under strict regulations and if a certain percentage of their outstanding loans are considered bad debt, they can be fined and sanctioned. So, banks are actually eager to get rid of the property, so long as it does not hurt them more if they do a short sale.

In order for the lender to approve the short sale, the borrower must be experiencing genuine financial hardship, and you will have to prove your hardship by providing documents like financial statements, stocks, bonds, tax returns, medical bills, pay stubs, divorce decree, etc, as well as a "Hardship Letter" from the borrower which has a detailed explanation on the why they can no longer pay the mortgage.

These documents will not be enough to get the lender's approval for the short sale. The homeowner will have to put the house on the market and sell the property. Once you do, you will need to provide additional documentation. You will need to provide a copy of the comparative market analysis, a copy of the purchase agreement, and a net sheet which shows the net or loss from the sale of the property.

The forgiven debt is considered taxable income, and therefore, will be reported to the IRS

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