Summary: A short sale often happens when the value of a home drops by 20% or more. Short sales are also a financial option for distressed homeowners (borrowers) who are behind on their mortgage payments or have a home that is worth less than the outstanding balance on the mortgage.

The Lender’s Role

Before the process can begin, the lender that holds the mortgage must give permission to execute a short sale. They need documentation that explains why a short sale makes sense to the homeowner, because the lending institution, typically a bank, could lose a lot of money in the process.

The Buyer’s Role

If approved for short sale, the buyer negotiates with the homeowner first. Then they seek the approval for the purchase from the bank second. It is important to understand that short sale may not occur without the lender’s approval.

The Pros to Short Sales

Short sales can be lengthy and paperwork-intensive transactions. It can take up to a full year to process. However, short sales are not as detrimental as a foreclosure is to a homeowner’s credit rating. A short sale looks better to future lenders and creditors, showing that you took action before the bank had to repossess your home. A homeowner who has gone through a short sale may even be eligible to purchase another home immediately.

Definition According to Merriam Webster

Short Sale (n): the sale of a mortgaged property in which the property owner receives for the sale less than the amount owing on the mortgage loan and the lender agrees to accept the amount received as payment in full of the mortgage loan