The last time this rickety life boat set sail to bail out home owners, crashing waves of failed tech companies had left home owners submerged in a sea of mortgage debt and those flimsy unemployment paychecks just couldn't keep them afloat.

This time around, sink-or-swim mortgages are taking on water, forcing home owners to jump ship before the swell of adjustable mortgage rates crash dreams into rocky reefs stripped bare by receding rates of appreciation.

The short sale is churning through choppy waters in the housing market again and while the motion of the ocean has changed the risk remains the same.

Grabbing hold of a short sale to save your home is a lot like taking on Moby Dick -- it could be your salvation or it could really take you under.

A short sale occurs when a lender agrees to write off the portion of a mortgage that is higher than the value of your home (an "upside down" mortgage), provided a buyer is willing to purchase the property.

For example, your mortgage and all pay off costs are $500,000, but your home, should you attempt to sell it will only bring in $450,000.

Some home owners are taking a hard look at short sales because, well, their mortgages have capsized.

This time around upended mortgages are the result of a variety of factors from risky, high-leverage, little- or nothing-down mortgages that don't begin with any equity to interest-only or optional-payment mortgages that don't build cash equity as well as appreciation that balks, or a combination of all of the above.

The short sale strategy can sometimes ease you into dry dock better than a bankruptcy or foreclosure, but only if you survive the trip to shore.

A short sale is a difficult consumer real estate transaction to approve and involves as much, if not more paperwork than an original mortgage application.

That's because, instead of proving your credit worthiness and financial stability, you must prove you are broke. You must be without cash flow, including savings, investments, trusts, liquid retirement funds or other finances to tap.

Ironically, while you are proving insolvency you also may reveal the dark under side of your original application. Insolvency today could be rooted in financial trouble that began before you purchased your home -- trouble you didn't reveal to your lender who could now consider your tight lip fraud from the past.

That might attract the attention of federal authorities who've been cracking down on mortgage fraud, a federal crime punishable by up to 30 years in a federal pen or up to $1 million in fines -- or both.

According to the FBI's "Financial Crimes Report To The Public Fiscal Year 2006," 20 percent of today's mortgage fraud stems from a home buyer lying about income, debt or other information in order to buy a home.

Much of the remaining 80 percent of mortgage fraud also involves deceit, deception and misinformation, according to the FBI.

In addition to reopening your application, the short sale will look at other liens against the home.

Property encumbered by a second mortgage will likely kill a short sale deal, because the second lender typically won't remove its lien and risk losing its investment position. A private mortgage insurance holder will also want to protect its interests.

Second mortgages and mortgage insurance were instrumental in helping home buyers obtain buoyancy during the housing market's boom years of fast appreciation and sinking affordability.

And there's more.

Before you can even approach the lender you typically must have a firm market-value offer from a qualified buyer and a broker who can negotiate the deal. Or you'll have to negotiate the lender into accepting the deal.

And when you can least afford it, you'll need a squad of professionals -- an attorney to negotiate what the lender will report to the credit agency and other issues; a real estate agent to get comparable sales information; perhaps an appraiser to cinch the value; and a tax professional.

The deal isn't over until the tax collector sings.

The difference between your home's value and the balance on your mortgage is considered a forgiveness of debt and unless you work out a deal with the lender to repay the difference over time, the amount will be considered taxable income.

Miami real estate agent Izzy Buholzer who offers a seven-step short sale process, says it's imperative to get qualified real estate, tax and accounting professionals in your court for the process.

"If a property is sold under a short sale, the lender may require the buyer to make up the difference, either through a personal obligation or a collection," says Buholzer.

He warns that "the IRS often gets involved with short sales," because they are seen as a relief of debt and may be treated as income.

"Check with your accountant," he concludes.

Published: April 9, 2007

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.