For many homeowners facing foreclosure, a short sale may be a viable way to stop foreclosure. To understand the premise of a short sale, it is important to first analyze the circumstances under which so many homeowners essentially owe more on their mortgages than what their homes are worth.

Why Homeowners are Underwater in Their Mortgages
During the real estate boom a few years ago, home values across most of the country skyrocketed. Many home buyers purchased homes during this time, often with adjustable rate mortgages. Most homeowners were under the assumption that once the adjustable rate mortgage adjusted, they could refinance or sell the home for more than they paid.

Unfortunately, the mortgage bubble burst and so did home values. Homeowners looking to refinance or sell their homes then found themselves in a position where they owed more on their home than what it was worth. They were, essentially, “upside down” or underwater in their mortgage.

This left homeowners with adjustable rate mortgages that they couldn’t afford and who simply had no way out. With so many homeowners facing foreclosure, and so many lenders forced to begin the foreclosure process, many homeowners looked to selling their homes via short sales to stop foreclosure.

How a Short Sale Works

A short sale occurs when homeowners sell their homes for less than what they owe in their mortgage in an effort to stop foreclosure. Short sales, which must be approved by the lender, are a way for the lender to avoid the costly process of foreclosure. A short sale is also a way for homeowners to avoid a hit on their credit that a foreclosure would create.

Although the lender essentially loses money on a short sale, they often agree to this type of sale to stop foreclosure, which has a lengthy and costly process. There are some important facts you should know about using a short sale to stop foreclosure.

* To sell your home via a short sale, you must convince your lender that it is in their best interest to stop foreclosure and sell the home now, instead of going through the foreclosure process.

* You may be able to refinance your current loan to avoid a short sale and stop foreclosure.

* The difference between the money you receive for your home in a short sale and the money still owed to the lender (in other words, any amount of debt that is forgiven by the lender) must be taxed as income by the Internal Revenue Service.

* Short sales are most commonly seen during buyer’s markets because of the lack of competition and lower home prices.

* Often times the lender will agree to a short sale only if the homeowner signs a promissory note to pay the difference between the original loan and the sales price of the home from the short sale.

Using the short sale strategy has become a very widespread phenomenon with homeowners across the country who want to stop foreclosure – and protect their credit scores.