What to do short of foreclosure

NEW YORK

For a homeowner who needs to sell but has a mortgage balance higher than the property value, one option is something called a “short sale.”

And don’t let the name fool you. This type of sale is complicated and can drag on for months.

So what exactly is a short sale? Here are some questions and answers.

Question: What is a short sale?

Answer: A short sale happens when a lender allows a borrower to sell his or her home for less than what’s owed on the mortgage. The lender usually forgives the difference and considers the debt repaid.

Q: How often do short sales occur?

A: Short sales now make up about one in every 10 home sales, according to the National Association of Realtors. That’s a lot more than you usually see when the housing market isn’t distressed - in fact, the association doesn’t have historical records on short sales before the current downturn because they were such an insignificant segment of the sales market.

Falling home prices have eroded home equity at a rapid place, making short sales more commonplace. About 16 million homeowners owe more than their homes are worth and would have to seek a short sale if they were forced to sell their homes now.

Q: What’s in it for the lenders?

A: Lenders minimize their losses. If the borrower defaults and the bank has to foreclose, there are extra costs to auction the property and maintain it while it’s vacant. Foreclosed homes also typically sell for much less than short sales.

Q: What are the drawbacks for the borrower?

A: While not as bad as a foreclosure, a short sale will still blemish a borrower’s credit report. A short sale would knock an “A” borrower down to a “B” borrower, while the same borrower would fall to “D+” after a foreclosure, said Ritch Workman, co-owner of Workman Mortgage in Melbourne, Fla.

The extent of the damage also depends on the borrower’s credit history before the short sale. A borrower with good credit won’t get hit as hard, while a borrower with tarnished credit will feel more pain.

Normally, a borrower would have to pay taxes on the forgiven part of the balance, though the George W. Bush administration granted homeowners a reprieve that applies to debt forgiven through 2012.

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