What is a Short Sale?

In real estate terminology, short sales refers to the house being sold lesser that the mortgage owed by the seller. The house will only be for short sale with the lender’s approval. It is tedious process which requires a lot of paper works and the decision might take a year.  To demonstrate how a house can be put under short sale, let’s say that Mr. and Mrs. Jones borrowed $500,000 to purchase a house eight years ago. Again, the price of the house that time is $500,000. An unlucky accident forces Mr. Jones to be out of work and therefore has hard time paying off the mortgage.

They decided to sell the house with a market value of $400,000, which is $100,000 lesser than the mortgage. When the house sells, the bank receives $100,000 less than what the Jones’ borrowed. Even if it is lesser, the bank considers the mortgage fully paid. Short selling the house doesn’t always work negatively for the bank. It also has its advantage. By selling the house, the bank avoids re-acquiring the home in foreclosure, which is an expensive and slow process.

On the other hand, it benefits the seller by making him avoid the negative credit report should the house be declared for foreclosure.

He will also avoid being considered bankrupt which is good if he decides to purchase another house in the near future. Short sale is different from foreclosure. Short sales are initiated by the homeowners who are facing difficulty paying their mortgage because of unforeseen events. Before the homeowner is approved of short sale by the lender, he needs to present documents or reports stating his incapacity to pay for the house. Those documents will be investigated by the lender.

After all the documents have been submitted and the finding is in favour of the home owner, that’s the time that the lender can give authorization from the owner to sell the house. Again, it is important that the house needs to have permission from the bank to be listed under short sale

A foreclosure on the other hand, is an action initiated by the lender seizing the house after delinquent or non-payment from the owner.  The process of foreclosure doesn’t take that long as compared with short sale because in foreclosure, the lender wants to liquidate the property right away. The lender can auction the house at a “trustee sale” where prospective buyers can bid for the home in a public process.