Up until recently, homeowners who are upside down on their mortgage had little recourse other than foreclosure. That’s not a good option because a foreclosure remains on your credit record for at least 10 years.

To avoid going into foreclosure, many experts are now advocating a short sale.  In a short sale, the lender allows the property to be sold for less than the total amount due on the loan.   Basically, the bank eats the loss (although they could still demand the homeowner to make some kind of payment or share part of the loss).

When the housing market was booming and real estate values were appreciating year after year, short selling was virtually unheard of.  With the current economic struggles and mortgage crunch, more and more home owners are looking to this practice as a way to avoid a costly foreclosure.

The benefits of short selling over foreclosure are obvious.  A foreclosure puts a long-lasting black mark on your credit history, the process can be long and costly, and will prohibit the homeowner from purchasing another home for at least 7 years.  Short selling can be much faster and less expensive, and it doesn’t look as bad on your credit report as a foreclosure.

Convincing a lender to short sell a property, however, can be very difficult.  For this reason it is best to work with a licensed Realtor that has the designation of a Certified Distressed Property Expert (CDPE).

If you find yourself in distress it is best to curb and scale back your own spending.  Expensive and unnecessary purchases on a credit card will make the bank less inclined to do you any favors.  Also, be prepared that if your bank absorbs the loss, the IRS might treat that as a taxable income and you’ll be responsible for paying taxes on that.

Of course, the better and always best option, is to find some way to stay in the house.  Contact the lender and see if they are willing to restructure the loan, or forgo a couple of monthly payments to help you get back on your feet.  Lenders loan money, they don’t want to become property owners/managers (especially in a declining market) so they are willing to make accommodations to avoid taing the property back.