When homeowners can no longer afford their mortgage, and they need to avoid foreclosure, one way to achieve this could be pulling off a short sale. This could further help homeowners to avoid having to make up a deficiency as well. But of course, a short sale has its drawbacks. Read more to learn about what a short sale can accomplish, and why it may or may not be worth it.

To have a short sale, a lender has to allow you to put your house on the market (or on auction) for a price that is lower than your loan amount (hence the "short" in short sale; you will be short of what you owe). While you might be allowed to sell the house, there are a considerable number of states where the lender can go after the former homeowner, filing a lawsuit to get back what is left on the loan. This deficiency is the shortfall incurred by selling the house for a smaller amount than your loan, the deficit. If your state allows a lender to sue you to recover a deficiency, then before you go for the short sale, get the lender to say in writing that they will not sue you for this deficit.

With that in mind, we can look at the potential benefits of a short sale. First of all, there is becoming free of a mortgage that is bankrupting you. Of course, you can only get this benefit if your lender agrees to not go after you for the deficiency, or if you already live somewhere where deficiencies are outlawed. If your lender will not waive this right to sue you, then you should be aware that some states do not allow lender's to sue for a deficiency after a foreclosure. In this instance, you may want to consult an expert on whether or not it would be better to go through foreclosure after all, as opposed to a short sale. But this would negate the benefits of keeping a foreclosure and/or a bankruptcy off of your credit history, not that a short sale won't inflict some damage to your credit score. But a short sale could be less harmful than a foreclosure.

Of course, there are some complicating factors when it comes to a short sale. First of all, you cannot ask the lender to agree to a short sale until you actually have an offer on the house. So it can be really difficult to try to pull off this sale, when you do not even know what price the lender will let you sell the house for. Then if you have a second or third mortgage, or if you have a home equity loan or line credit, then you need all the lenders to agree to the short sale. Yes, that is a very tall order, along the border of impossible.

Then, as if tax season were not troublesome enough, your short sale will add something to the spirit of that season. While a lender might not be able to go after you for the deficiency in a short sale, the IRS will view cancelled debt as taxable income. Now there is one year left where the Mortgage Forgiveness Debt Relief Act of 2007 might save you from this tax, definitely something to research further.

After all, you have to be knowledgeable of what exactly a short sale will mean for you. This is a complex process, fraught with risk, but a risk that might be worth taking. To find out if this is right for you, consult a real estate lawyer today!