What is a short sale?

A short sale is typically used to prevent foreclosure. It’s the sale of a property, with creditor authorization, for less than what is owed. The remainder of the debt is forgiven. The property’s value must be "over-mortgaged" -- less than what is owed -- and the loan must be in default. The homeowner must be insolvent and incapable of covering the shortfall.

Short sales are better than foreclosures because they reduce damage to credit ratings, said Oscar Morante of Portland-based Advanced Real Estate Concepts LLC. Morante, an investor, runs a consulting business that trains West Coast real estate brokers on short sales. A foreclosure remains on credit records for about 10 years, while a short sale only as long as three years.

Short sales also eliminate other home-related debts, Morante said. Often after a foreclosure, the former homeowner still must repay home-equity loans or cash out second mortgages not fully paid by the foreclosure, he said.

And, as of December, short sellers no longer must pay income tax on the "forgiven debt." The maximum forgiven debt is $2 million for a married couple filing jointly, and $1 million for a single person.

A short sale is not an option if the homeowner can liquidate assets, is gainfully employed and can or will be capable of paying the shortfall, Morante said. In that case, a release of lien can avoid foreclosure. The property is sold for less than owed, but the homeowner must pay the shortfall to the lender through a payment plan.

For help

Resources for dealing with or avoiding foreclosure:

U.S. Department of Housing and Urban Development: hud.gov/local/or/homeownership/foreclosure.cfm

Oregon Division of Finance and Corporate Securities: cbs.state.or.us/dfcs/ml/foreclosure.html

Oregon Department of Consumer and Business Services: egov.oregon.gov/DCBS

-- Gosia Wozniacka

Oregonian Link