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4 min read Apr 01, 2023

What is a Short Sale and Understanding How it Works

A short sale is a real estate transaction where a homeowner sells their property for less than the amount owed on their mortgage. Homeowners typically do this to avoid foreclosure and the negative impact it can have on their credit score.

In a short sale, the homeowner’s mortgage lender agrees to accept the sale price as payment in full. Even if it is less than the outstanding balance on the mortgage.

What are Short Sale Homes?

Short sale homes are properties that are being sold in a short sale. Buyers who look for a good deal may find the homes attractive. Because they are often priced lower than comparable properties on the market.

However, it’s important to note that these homes can be more difficult to purchase than traditional homes due to the complex nature of the process.

How Does a Short Sale Work?

The short sale process can be complicated and time-consuming. In order to sell their home, the homeowner must first contact their mortgage lender and request approval for the sale.

The lender will then review the homeowner’s financial situation and determine whether or not they qualify. If approved, the lender will typically require the homeowner to provide documentation of their financial hardship, such as bank statements and tax returns.

The lender will also require an appraisal of the property to determine its market value. Once the lender approves, the homeowner can start marketing their home for sale. The homeowner must submit any offers received to the lender for approval.

The lender will then review the offer and either accept, reject, or counter the offer. If the offer is accepted, the sale can proceed to closing.

The Benefits and Drawbacks of Short Sales

» Benefits of Short Sales:

  1. Avoiding foreclosure: One of the primary benefits of short sales is that they allow homeowners to avoid foreclosure, which can have a devastating impact on their credit score and make it difficult to secure future loans.
  2. Faster credit score recovery: Short sales typically result in a faster credit score recovery than foreclosures. This can be beneficial for homeowners who want to rebuild their credit and potentially buy another home in the future.
  3. Potential for debt forgiveness: In some cases, lenders may forgive some or all of the outstanding debt on the mortgage, which can provide relief for homeowners who are struggling to make ends meet.
  4. Opportunity for buyers: Short sales can offer buyers an opportunity to purchase a home at a lower price than they would find on the open market, potentially allowing them to get more house for their money.

» Drawbacks of Short Sales:

  1. Lengthy process: Short sales can be a lengthy process, often taking several months or more to complete. This can be frustrating for both buyers and sellers, who may have to put their plans on hold while waiting for the sale to go through.
  2. Uncertainty: Because short sales require approval from the lender, there is a degree of uncertainty involved. The lender may reject the offer, request additional documentation, or take other actions that can delay or derail the sale.
  3. Potential tax implications: Depending on the circumstances, homeowners may be responsible for paying taxes on any debt that is forgiven by the lender. This can result in unexpected tax bills that can be difficult to manage.
  4. Limited negotiation power: In a short sale, the lender has significant negotiating power, which can limit the seller’s ability to negotiate terms or get the best price for their home. This can be frustrating for homeowners who are already in a difficult financial situation.

» How to Buy a House With Bad Credit: Understand the terms, conditions, and minimum credit score requirements

Final Word

In conclusion, a short sale is a real estate transaction where a homeowner sells their property for less than the amount owed on their mortgage in order to avoid foreclosure.

While short sales can be beneficial for both homeowners and buyers, they can also be complex and time-consuming. It’s important for both parties to carefully consider the benefits and drawbacks of a short sale before proceeding.


Why would someone do a short sale?

When a homeowner can no longer afford their mortgage payments, they may opt for a short sale instead of waiting for the bank to foreclose on the home.

Why do sellers choose a short sale?

Through a short sale, a seller can avoid foreclosure and be released from some or all of their mortgage obligation with the lender. Compared to foreclosure, a short sale may allow for quicker approval for financing on another home, and the recovery of the seller's credit rating may be faster, as noted by mortgage lender Quicken Loans.

Why do banks prefer foreclosure to short sale?

Similar to any other business, banks are seeking to earn a profit, and they may opt for a short sale over foreclosure if it costs them less to do so. The bank may prefer a short sale because in a foreclosure, the bank takes ownership of the property and resells it at a mortgage auction to the highest bidder.

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