What Is a Bank Short Sale?

A bank short sale is an agreement between a mortgage lender and a homeowner that allows the homeowner to sell the home for an amount less than what is owed. In a straight bank short sale, the difference between the selling price and the original mortgage is written off by the lender.

Qualification and Procedures

Each lender has its own procedure to qualify a homeowner for a bank short sale. Although lenders are encouraged to approve short sales through the Home Affordable Foreclosure Alternatives Program, a lender is not required to accept a short sale request. It is advised that a homeowner contact her lender to discuss the short sale option if the value of her home has declined to the point that it is less than the outstanding balance on the mortgage and the lender is going to start the foreclosure process.  

Tax Consequences

Under normal circumstances, the dollar amount that the mortgage lender writes off due to a bank short sale will become taxable to the homeowner. The Mortgage Tax Relief Act of 2007 provides one exception to this rule. The act allows for the tax exclusion of debt forgiveness on a primary residence through the year 2012. A homeowner should contact a tax accountant and real estate attorney to discuss any tax consequences before accepting the terms of a bank short sale.


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