If you’re thinking of selling your home, and you expect that the total amount you owe on your mortgage will be greater than the selling price of your home, you may be facing a Short Sale.

A short sale is one where the net proceeds from the sale won’t cover your total mortgage obligation and closing costs, and you don’t have other sources of money to cover the deficiency.

A short sale is different from a foreclosure, which is when your lender takes title of your home through a lengthy legal process and then sells it.

If you are thinking of selling your home because of financial difficulties and you anticipate a short sale, first contact your lender to see if it has any programs to help you stay in your home. Your lender may agree to a loan modification such as: Refinancing your loan at a lower interest rate; providing a different payment plan to help you get caught up; or providing a forbearance period if your situation is temporary. When a loan modification still isn’t enough to relieve your financial problems, a short sale could be your best option if:

1. Your property is worth less than the total mortgage you owe on it.
2. You have a financial hardship, such as a job loss or major medical bills.
3. You have contacted your lender and it is willing to entertain a short sale.

Your lender will give you a list of documents it requires to consider a short sale. The “package” that accompanies any offer typically must include:

1. A hardship letter detailing your financial situation and why you need it
2. A copy of the purchase contract and listing agreement
3. Proof of your income and assets
4. Copies of your federal income tax returns for the past two years

Even if you’re well organized and have all the documents in place, be prepared for a long process. Waiting for your lender’s review of the package can take several weeks to months. Some experts say:

1. If you have only one mortgage, the review can take about two months.
2. With a first and second mortgage with the same lender, the review can take about three months.
3. With two or more mortgages with different lenders, it can take four months or longer.

When the bank does respond, it can approve the short sale, make a counteroffer, or deny the short sale. The last two actions can lengthen the process or put you back at square one.

Even if your lender does approve the sale, it may not be the end of all your financial woes. Here are some things to keep in mind:

1. You may be asked by your lender to sign a promissory note agreeing to pay back the amount of your loan not paid off by the sale. If your financial hardship is permanent and you can’t pay back the balance, talk with your real estate attorney about your options.
2. Any amount of your mortgage that is forgiven by your lender is typically considered income, and you may have to pay taxes on that amount. Under a temporary measure passed in 2007, the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act, homeowners can exclude debt forgiveness on their federal tax returns from income for loans discharged in calendar years 2007 through 2012. Be sure to consult your real estate attorney and your accountant to see whether you qualify.
3. Having a portion of your debt forgiven may have an adverse effect on your credit score. However, it will impact your credit score less than foreclosure and bankruptcy.