How do you protect yourself during a short sale?

You were so excited to buy your home and everything seemed perfect -- until your financial troubles set in. Maybe you got a divorce, lost a job or had a medical crisis in the family. Whatever the issue, your mortgage suddenly became more than you could handle, and you started looking for a way out of your situation. The home goes back up for sale.

Then, the bottom drops out of your world. You find out that the real estate market in your area has shifted dramatically, and your house is worth less than you owe. Or, alternately, you simply don't have enough equity built up yet to pay a realtor, and you don't have any luck trying to sell it on your own.

Is a short sale right for you? Maybe.

A short sale (sometimes called a "preforeclosure" sale) occurs whenever a homeowner sells the home for less than their mortgage. This tactic can allow a homeowner in financial distress to avoid the stigma of a foreclosure on their credit record and get rid of their mortgage.

Naturally, of course, it isn't quite that simple. The short sale process requires your lender's approval before you can proceed -- and that's where you have to be very cautious. Make certain that you understand exactly what you are getting into if you decide to go this route in order to protect yourself.

Some questions you need to ask include:

  • How does the mortgage company determine your eligibility for a short sale?

  • How long will you have to find a buyer before the bank moves to foreclose?

  • Do you have to keep making the mortgage payments in order to move ahead with the short sale? What happens if you can no longer afford to make them?

  • Once the short sale is complete, what happens to the remainder of your loan?

Some companies recognize that people who need to go the short sale route are already in financial distress and they write off the remainder of the loan. Other companies aggressively pursue the difference between what you get for your home and the mortgage you had through a means called a deficiency judgment.

If you're struggling with your mortgage and are seeking an alternative to foreclosure such as a short sale, it may be wise to get some experienced legal advice on your situation.