What Is a Short Sale?

Published

October 23, 2014

AJ Smith is an award-winning journalist with more than a decade of experience in television, radio, newspapers, magazines and online content. She currently serves as the managing editor for SmartAsset. AJ has a passion for meeting new people, sharing stories and helping others. She has degrees from Princeton University and Mississippi State University. AJ and her husband also write and illustrate educational children’s books.

The world of real estate can be confusing, and sometimes, even with careful planning, mortgage payments can be difficult to make. If you find yourself faced with options like foreclosure, bankruptcy or a short sale, it’s important to understand your choices.

A short sale is for those who do not qualify or do not want to refinance their home mortgages. In this situation the seller can accept a lower bid for the property to increase the chances of a quicker sale. This requires that the lender agree to accept a payment lower than the balance owed on the mortgage. The lender takes a loss but gets at least some (or even most) of its money and both parties avoid foreclosure.

The Process

Short sales can be a long and complicated process and require a streamlined communication line between seller and mortgage lender. Most creditors require that the borrower show that financial hardship is preventing them from making mortgage payments. Different creditors require varying conditions and documentation, so be prepared to negotiate. A good way to start is by gathering a letter of authorization to allow your agent to get information from your lender, a closing net sheet, proof of income and assets, copies of bank statements and a comparative market analysis. Once you receive an offer from a potential buyer, you must contact your lender and ask for approval for that specific offer.

If you are considering purchasing a house through short sale, you can get a great deal. But there are some special considerations that you will have to consider. For example, not all short sales are great deals — it’s a good idea to factor in the cost of any necessary repairs or of the tax ramifications before you sign on the dotted line.

Pros

The most obvious advantage of short sales is avoiding the lengthy foreclosure process and its impact on your credit score. (You can get your credit scores for free, plus a snapshot of the major factors impacting your scores on Credit.com.) You will also avoid having to pay the full balance of the loan you can no longer afford, though you may be stuck with a tax bill for the canceled debt down the road.

For buyers, the biggest advantage is the prospect of buying a property at a big discount. Short sale homes usually are in better shape than foreclosures, with more cooperative sellers.

Cons

It is first important to understand that not all lenders will agree to consider the loan balance paid or approve a short sale. Sellers should receive a solid commitment from lenders before moving forward with potential buyers. Also, even though you are avoiding a foreclosure, short sales can affect your credit scores, and you should work with the lender to figure out how the process will be reported to credit agencies.

As a buyer, short sale homes can be more complicated; it’s a good idea to consult a real estate agent or attorney to help with the deal.

If you are a struggling homeowner it’s important to look over all of your options, including a short sale. Although short sales are not necessarily pleasant transactions, they can be worth investigating if you are struggling to make mortgage payments each month or if you are looking to buy a home.