A friend of mine bought 3 houses about a year or two ago, speculating that housing prices will go up. With no strategy in mind he recently lost his job and was stuck with 3 mortgage payments. He is a victim of a sub prime loan. I was puzzled when he got approved on all 3 loans considering that his income was not really substantial to cover all 3 mortgages.

Short sale: Win-win-win situation

The beauty of short sales is that they can be a win-win-win situation for seller, buyer and lender. Here’s how:   • The seller gets out of the mortgage liability without facing bankruptcy.   • The buyer gets the home at a reduced price.   • The lender agrees to a loss it considers minimal without waiting through a foreclosure and being saddled with an unsalable property.

A short sale

A short sale, in real estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage. It is a procedure sometimes agreed to by lenders, who often would rather take a small loss than go through the lengthy and costly foreclosure process. — in which the lender allows the sale of a home for less than it is worth and forgives the rest of the note — provides another alternative to homeowners.
A buyer’s dream
For a buyer, a short sale is a boon since he or she is getting a property at a reduced price. However, the process of waiting for a lender to decide whether to agree to a short sale could make a lengthy home buying process even longer and more arduous.

Last gasp only
While getting a lender to agree to a short sale may seem like an answer to the prayers of homeowners who want to unload a house, it’s not a good move if you’re merely looking to find a new place. It’s generally a last-ditch effort when the only other option is foreclosure.

3 critical safeguards
If you’re considering a short sale, experts advise you to take the following steps to meet potential negative consequences head-on.

Get it in writing. Make sure the lender agrees in writing that the short sale will absolve all debts.

“If they owe $300,000 on the house and the short sale is for $280,000, is there any possible way that the lender’s going to come after them for the $20,000?” Lohrenz says. “Most lenders will put that in the agreement that they’re not going to come after the deficiency.”

Protect your credit rating. Ask the lender how it will report the short sale on your credit report.

“Most of the time, a short sale shows simply that a debt is satisfied,” says Lohrenz. “But theoretically, a short sale could reflect on the credit report as ’settled for less than the full balance.’” Such a designation is a negative mark on your credit report, though it wouldn’t hurt your credit as much as a foreclosure would.

Get professional tax advice. Short sales often have tax repercussions since lenders can claim the forgiven debt as income that they provided you.

That means if you agreed to a short sale for $50,000 less than what you owed the lender, the lender could issue you a 1099 for $50,000, which you would have to pay taxes on.

But there are two “outs,” says Lohrenz. “If you meet the IRS’s definition of insolvency at the time the debt was forgiven, then you generally don’t have to pay taxes on it.”

Or, if your home loan is a non-recourse loan, you’re also likely to escape this tax. With a recourse loan, whoever signed the note is personally liable for the debt, and in a short sale, the debtor would have to pay tax on the difference. A nonrecourse debt is one secured by the loan collateral — such as the house itself — and the debtor would not have to pay tax on the sale shortfall.

The most common case is that mortgages secured by the property — especially for buyers who made a 20 percent or more down payment — is a nonrecourse loan. But it is absolutely critical you consult a tax attorney before you make such a move to ensure that you don’t dig a deeper financial hole as a result of the tax situation.

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Note: If you want to take advantage of the short-sale program, visit www.earntrueholdings.com/seller to apply. Your information is kept confidential. Time is of essence so act quickly.

BOSTON (MarketWatch) — Greg McBride, senior financial analyst for BankRate.com, says that many would-be home buyers are about to be stripped of a misperception, namely the idea that when the Federal Reserve Board is cutting interest rates mortgage rates will fall as a result.

In a radio interview with Chuck Jaffe, MarketWatch senior columnist, McBride noted that the Fed is combating the economy, but some observers worry that its bigger-than-expected move might be opening the door to inflation, a concern which has pushed mortgage rates up slightly since the Fed’s most recent move.

According to BankRate.com, the average 30-year fixed rate mortgage in the country currently carries a rate of 6.4%, which represents a reversal of course. The average mortgage rate had dropped below that level, to roughly 6.25%, in the two weeks leading up to the Fed announcement Sept. 18 that it was cutting the target for the federal funds rate to 4.75% from 5.25%.

McBride noted that the Fed’s rate cut is bad news for long-term savers, as rates on certificates of deposit maturing in two or more years have fallen, while short-term rates have remained steady. This erases any risk premium that a saver gets for tying up money for a longer stretch of time.

Listen to the interview with McBride.

MarketWatch senior columnist Chuck Jaffe hosts “Your Money” every weekday from 6 a.m. to 7:30 a.m. Eastern on AM-1060, WBIX in Boston. The show features expert interviews on a wide range of financial topics, including regular chats with fund managers and investment advisers making stock or fund picks and pans.

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Home resales slipped for the sixth month in a row in August as the credit squeeze forced many sales to fall through, the National Association of Realtors reported Tuesday. With sales of existing homes falling 4.3% to a five-year seasonally adjusted low, inventories of unsold single-family homes rose to an 18-year high. Meanwhile, a separate gauge of home prices fell for the 12th straight month, with prices falling in 15 of 20 major cities over the past year. Prices in 10 major cities are falling at the fastest pace in 16 years. See Economic Report.

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