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Chapter 1: What is a Short Sale?

Buying a short sale could save you thousands of dollarsMany homeowners and homebuyers alike begin considering short sale transactions without fully understanding what a shortsale is and how it works. Before deciding on this transaction as a method to avoid foreclosure or before choosing to purchase short sales, understanding these transactions thoroughly is important.

Defined by Wikipedia, “A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts, and whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt.”

For example, if the homeowner still owes $100,000 on their home and they are able to sell the property through a short sale for $90,000, the lender may accept that $90,000 as full payment, even though it is less than the unpaid balance of the home loan.

Explained more simply, shortsales are options that certain homeowners may try to use to avoid foreclosure. This option is used when the lender allows the borrower to sell the home to a third party at a lower price than the amount that is owed on the home loan. While borrowers can initiate this option, it is important to note that a short sale cannot proceed without the final approval of the lender.

All creditors that hold liens on a piece of property must approve applications individually for short sales if they are being requested to accept less than the amount they are owed. This includes both primary mortgages and junior lien holders, which can include HOA liens, home equity lines of credit (HELOC) lenders and second mortgages. In most cases, lenders will require proof from the borrower that they are dealing with some type of hardship and the loss mitigation department of the creditor will evaluate the application of the borrower.

Both the lender and the borrower must agree to the short sale. In many cases, both can benefit from these transactions. Borrowers can benefit from avoiding a foreclosure, which can be devastating to their credit report. While a short sale does have an impact on borrower credit, its impact is not as drastic. Lenders can benefit by avoiding the high cost of going through foreclosure proceedings, especially since foreclosures are currently taking more than 300 days to settle.

Next: How short sales work