Short sale advice: the long an short of it

With foreclosures at their highest level in many years, homeowners trying to escape mortgage default are opting for alternatives to losing both their home and credit score. As a means of avoiding foreclosure, home owners do have options, some more attractive than others:

Reinstatement is one option which the lender allows the mortgagee to make the arrears and any attorney’s fees and costs to bring the loan current; thereafter, the mortgagee must stay current.
PMI (Private Mortgage Insurance) or Lenders Mortgage Insurance (LMI), is insurance payable to a mortgage lender that is usually required when a mortgagee takes out a loan. Should the borrower be unable to meet their obligation and pay back the loan, PMI or LMI insurance will make up for the shortfall if the mortgagor is can not recuperate its costs after a filing a foreclosure action and subsequently sell the property.
As a last resort, borrowers may be able to voluntarily "give back" their property to the lender (known as a deed-in-lieu). While this option will not allow them to keep their house, it is not as damaging to their credit rating as a foreclosure.
If your home is worth less than the amount you owe, you might be a candidate for a short sale. A short sale affects credit but it’s not as bad as a foreclosure. You or your real estate agent will need to negotiate with your lender to find out if the lender will cooperate on a short sale. This is called a pre-foreclosure redeemed and allows mortgagees to avoid foreclosure by selling their property for an amount less than the amount necessary to pay off their mortgage loan.
Mortgagees may qualify for a short sale if:
1. The loan is at least 2 months delinquent;
2. You are able to sell your house within 3 to 5 months; and
3. A new appraisal (that your lender will obtain) shows that the value of your home meets HUD program guidelines.
Contact the lender for their short sale guidelines; once they agree to a short sale, add up all of the costs associated in selling your property – this includes real estate commission, closing costs and any other loans or liens against the property. You can determine closing costs through your real estate agent, or if you are selling the property directly as the owner, phone a local title company for an estimate.
Take the total owed on the property with the selling costs and subtract that amount from the estimated sale price (in a short sale, this will show as a negative amount) but keep in mind, the IRS will regard the sale of your home as income and tax you accordingly. Mortgagees that can afford the taxable income should note that a short sale or deed-in-lieu will be recorded on their credit. Moreover, there is no guarantee the lender will not pursue legal action against the borrower for the difference – bankruptcy can clear the slate at least if no workout is possible

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