O boy this is a big question!
1) The primary answer is YES you can do a short sale. The definition is simply when a homeowner owes more on their home then what it is worth.
2) You will not be responsible for any costs of doing this....that is the whole reason why most homeowners have to do a short sale in the first place. You don't pay me anything, and the reason why we do a short sale is so you don't owe the bank anything.
3) Minnesota is a non-recourse state, which means the primary lender can not pursue you PERIOD if this home were to go into foreclosure. Your credit scores are not effected that much differently between a short sale and foreclosure (Bankrate.com has done numerous studies on this to prove it). The time to repurchase a home after a short sale and foreclosure are both 3 years.
4) So why do it? Number 1 subordinate liens (example $60,000 Home equity loan) act differently than first mortgages. You as the homeowner do not have the same protection against these, and they do have a legal claim to pursue you after a foreclosure for the amount you owe them. In a short sale situation I am able to negotiate it so you do not owe them one penny. When we speak directly I will tell you more about this.
5) Number 2 is IF DONE CORRECTLY you can repurchase a home immediately after a short sale, or at least shorten the time to repurchase from 3 years to 2 years. Are you & the spouse both on the loan? Is there just one of you? There are many factors that play into this and it all comes down to your specific situation.
6) So I am not going to pretend that short sales are for everyone that just is not true, but homeowners with multiple mortgages do benefit the most from a short sale.
7) As for pitfalls to watch out for? The biggest push back I get from lenders when I am negotiating a short sale is they want the seller to either:
1) Contribute large amounts of money at the closing table (which you do not have 99% of the time and is unnecessary)
2) Ask the seller to sign a "promissory note" that means you are still liable for a certain amount of the balance after a short sale (also not necessary).
As I have already stated Minnesota protects you against the primary lender, and there are plenty of ways to satisfy your debt with a equity loan without doing any of what I mentioned above. There are extremely rare cases where it makes sense to do either of what I have mentioned above.
8) I think the last pitfall is just getting bad service from us realtors. Number one my goal is to exhaust all refinancing options so you can stay in your home if that is desired. I have a specific loan officer that specializes in foreclosures, and I also help you contact your local HELP center (Free again) to make sure they review your file. Minnesota actually has a lot of good non-profits and government agencies that every homeowner should seek out FIRST.
9) I don't really get paid to do any of that, but I think it is important my clients have a peace of mind knowing they have the right team putting them first and foremost, and all options have been exhausted.
10) From there if the short sale is the best route I also have attorneys on call to answer your legal questions. DO NOT TAKE ANYTHING I AM TELLING YOU AS LEGAL ADVICE. Bankruptcy always comes up in a short sale situation and sometimes that is the best route. I can't really talk to you about this so I let you speak to an attorney on it.
so as you can see short sales are complicated and you want to have the right team to help you out. Every individual is different and I can not express it enough. We get questions like this on Trulia all the time and unless I know the whole story I just can't tell you what I don't know.
Hope to speak with you soon just contact me directly on Trulia.