In a short sale, a homeowner agrees to sell his property to a buyer at a price that is less than his mortgage due but his lender allows. Effectively, the lender does a principal reduction so the sale can be completed to a buyer. The biggest benefit to the lender is that a foreclosure action is avoided with its protracted time and costs to the lender.

However, the seller (homeowner) derives at least five major benefits from the short sale that include:

1. The homeowner may be able to stay in his home longer than if he allowed the property to go to foreclosure. This amount of time varies greatly but even in non-judicial foreclosure states, the time can range from one to six months. The time becomes a function of the homeowner finding a buyer and then the lender approving the transaction. Some short sales of very expensive properties have taken over two years, all the while the homeowner was in the property.

2. The homeowner’s credit rating will be “injured” doing a short sale but not destroyed as with a foreclosure. In a foreclosure the homeowner’s credit score will be impacted anywhere from 200 to 300 points depending on his former credit score at the time the late payments started. In a short sale the actual amount of credit damage varies greatly depending on late payments and the homeowner’s credit score before the short sale started. Generally, the reduction will be between 100 and 150 points by completing a short sale. The exact credit score deduction for either a short sale or a foreclosure can’t be determined accurately because the homeowner usually has other financial problems that add to his credit woes.

3. If the homeowner’s mortgage payments are still being paid timely when he starts the short sale, he could finance another home immediately with FHA and 30 days later with FNMA – if the previous lender forgives the deficit due on their loan. This is a huge advantage for a family who needs the ability to stay in a home instead of renting an apartment.

4. There should be no deficiency judgment as part of the negotiations with the homeowner’s lender. If the lender will not agree to forgive the deficiency judgment, the homeowner should consider staying in the property and mounting a foreclosure defense to prolong his stay. In lieu of a deficiency judgment, homeowner should ask that an IRS Form 1099 be issued. This makes the deficiency judgment amount ordinary income on which the homeowner must pay income taxes. If the property is the primary residence of the homeowner, this 1099 amount can be forgiven under current IRS regulations through the end of 2012. Check with a CPA to find out the existing law if you are making this decision about a 1099.

5. The homeowner has control of the sales process. If the lender goes to foreclosure, the homeowner will be evicted and he will have no control over the timing of his having to get out of his property. With control of the sales process, he can usually stay in the property longer while making his mortgage payment or not if he doesn’t want to. His credit report will reflect non-payment of his mortgage negatively and delay his buying another home in less than two years if his home goes to foreclosure. The homeowner will have to show the property to prospective buyers because the property will be listed with a real estate agent as required by the lender as part of the short sale process.

In summary, the benefits to a homeowner to do a short sale far outweigh the negatives of a foreclosure, especially where a waiver of a deficiency judgment is part of the agreement between the homeowner and the lender. The actual process of negotiating a short sale is tedious because of the bureaucracy of the lender and their general unwillingness to make decisions. This process is best left to a professional who does short sales on a regular basis. » Read more: Five Biggest Benefits of a Short Sale for a Homeowner Facing Foreclosure