What's a Short Sale?

When a homeowner has to sell and the property is no longer worth enough to cover the mortgage debt, a lender will sometimes agree to accept whatever the place can be sold for, and forgive the rest of the debt.  That's called a short sale.

Lenders will usually agree to it only if the borrower is behind in payments and "nearly destitute".  The benefit to the lender is avoiding the legal costs of foreclosure and the burden of holding and selling the property.  The benefit to the homeowner is that no foreclosure will appear on the credit record.  One drawback for the homeowner, though, is that the IRS regards whatever part of the loan that was never repaid, as income subject to tax.