The last couple  of months I've had to work with a new short sale property and it has been an educating process to me. I've had to do a lot of reading and fast learning in the process.

I found out that in many states, lenders can sue homeowners even after the house is foreclosed on or sold, to recover for any remaining deficiency (the difference between the selling and owed amount).

In a "short sale" the homeowner gets permission from the lender to sell the house for an amount that will not cover the entire loan (the sale price falls "short" of the amount owed to the lender).

***A short sale is beneficial if you live in a state that allows lenders to sue for a deficiency -- but only if you get your lender to agree (in writing) to let you off the hook.

How will a short sale help? The main benefit of a short sale is that you get out from under your mortgage without liability for the deficiency. You also avoid having a foreclosure or a bankruptcy on your credit record. The general thinking is that your credit won't suffer as much as it would were you to let the foreclosure proceed or file for bankruptcy.

What are the drawbacks? You've got to have an offer from a buyer before you can find out whether or not the lender will go along with it. In a market where sales are hard to come by, this can be frustrating because you won't know in advance what the lender is willing to settle for. (this is a very frustrating experience - it's like what came first: the chiken or the egg?)

What if you have more than one loan? If you have a second or third mortgage (or home equity loan or line of credit), those lenders must also agree to the short sale. Unfortunately, this is often impossible since those lenders won't stand to gain anything from the short sale. (I found that out with my client's line of credit... still have not received an answer on accepting or not of the offers we got!

Beware of tax consequences. A short sale may generate an unwelcome surprise: Taxable income based on the amount the sale proceeds are short of what you owe (again, called the "deficiency"). The IRS treats forgiven debt as taxable income, subject to regular income tax. You will receive a 1099-MISC showing the deficiency amount as regular income which you will pay taxes on. The good news iare that there are some exceptions for the years 2007 to 2009.