Definition: A short sale occurs when a homeowner sells their property for less than the amount owed on the mortgage, with the lender’s approval. This typically happens when the homeowner is facing financial hardship and is unable to keep up with mortgage payments, making foreclosure the alternative if the short sale is not completed.
Explanation: Unlike a traditional sale where the seller receives the proceeds, in a short sale, the lender must agree to accept a lower amount than what is owed on the loan. This process can be complex and time-consuming because the lender must review the seller’s financial situation, approve the proposed sale price, and agree to release the lien on the home. While a short sale can negatively impact the seller’s credit score, it is generally less damaging than a foreclosure.
Buyers looking for below-market deals often seek short sales, but they should be prepared for a lengthy approval process and potential complications. The property is usually sold as-is, meaning the buyer must accept any repairs or outstanding liens. Lenders may also reject offers they deem too low, making negotiations more difficult than a standard real estate transaction.
Example: A homeowner owes $300,000 on their mortgage, but due to financial hardship, they can no longer afford their payments. They list their home for $250,000 and receive an offer. The lender reviews the offer and agrees to accept the lower amount, forgiving the remaining debt. This allows the seller to avoid foreclosure, while the buyer gets a discounted property—though they may have to wait several months for lender approval before closing.