If you have the financial resources to make up the difference of what is owed to the lender, you will be expected to reach into your bank account or liquidate assets to do so. The fact the property does not sell for an amount high enough to cover the debt is not the determining factor. Your ability, or inability to pay the difference is the determinant.

The lender looks to see if a hardship exists that makes it unlikely that you could pay the difference. Some sellers work out arrangements w/ the bank to make payments after closing to cover the deficiency. While it is not an official requirement of most banks that you be “x” months behind on your mortgage, it is more difficult to claim hardship if your finances are in order and all payments are current. A lender approves a short sale when the alternative is likely to be less financially advantageous to the lender. Example: A property going into foreclosure and being sold by the bank is costly. A lender may approve a short sale because the amount they will receive via short sale is better than the net anticipated after a foreclosure. All short sales are not in foreclosure, but many are.

If you can work out a payment schedule w/ the bank or pay the deficiency, you will be in a better position than the damage to your credit. A weaker credit rating will cause you to be turned down for future credit, or your future credit will come w/ a much greater cost. The restrictions, lost opportunities, and increased costs of credit may be greater than paying the bank now.

You will need to evaluate your circumstances to ascertain what is the best course of action. If you do a short sale, yes, it will impact your credit.

Hi Trish,
All the answers so far have been "right on". As a mortgage consultant and real estate broker, I have had an opportunity to be involved in some short sale transactions. As some of the others have explained, it is very important that you and your real estate agent be knowledgeable in the short sale procedure, and that the agent representing the buyer is aware your contract is contingent upon bank approval of the sale. Another important question is whether or not you are in a pre-foreclosure or foreclosure status. Your original question had to do with the "effect" on your credit. The simple answer is that it will definitely affect your credit rating, however it has been my experience a short sale will not reflect as negatively as a foreclosure, and you may be able to qualify to purchase a home sooner if you negotiate a short sale versus having a foreclosure on your record (however it may still be 2 years before you are eligible). If you have any other questions, please feel free to ask!

Trish, Real estate is local, so things that happen in other areas may not be the norm in your area. I have to ask though, have you already asked for and completed a short sale package from your lender?

Trish, I just sat in on a seminar this week on short sales. Short sales or for people in preforeclosure who have gotten behind in payments and who have evidence of hardship. There is a department (loss mitigation) at your lender who must approve a short sale. They require a lot of papework from you (tax returns, pay stubs, hardship letter, comparable property sales from your area, etc.). If your were listed with a Realtor he/she should have had in the agent comments that the house is being sold by short sale and all offers must be approved by the lender. It is not your call to take the offer when selling short, but your lenders. Based on the info you provided I don't think you would be eligible for a short sale.

From what I've heard to be true, short sales only get approved when there is serious hardship and late payments. Seeing as you don't currently have any lates, a lender may find it difficult to see that your having issues. It almost sounds like this "short sale" was an after thought on someones part. Hopefully it works out for you.

Trish
the "short Sale' needs to have the agreement of the lender. Did your Realtor explain that no sale is final until the Lender accepts the offer...even then there can be issues.

Acceptance is not the same as closing escrow...
Make sure that your agrement includes "settled" as opposed to "foreclosure" on your credit report.
If you have questions, please re post.
Keith

Yes, it is a bruise on your credit. Not as bad as a foreclosure but bad. When it is time to buy again, you will need a letter of explanation. Hopefully they will understand the Mi market at the time you had to sell.

Trish - a, "Short Sale" will affect your credit, but not to the degree a foreclosure does. My understanding ... and this is strictly what I have heard here and there, as I've not had a client successfully sell on a short sale, only purchase short sales ... but I think there is a 150 +/- point credit point swing between a Short Sale and a Foreclosure. Please do verify that ... I am anxious to hear what my colleagues have to say...