What is a Mortgage Short Sale?

A mortgage short sale is a real estate transaction in which a property is sold with the lender’s consent for less than the amount owed on it. This type of sale typically occurs when the current property owner is unable to meet mortgage repayment obligations because of financial hardship or because the value of the property has fallen below the outstanding loan balance. In a short sale, the full proceeds from the property sale go to the lender, thus releasing the borrower, or seller, from his mortgage, though sometimes with the provision that he will repay the difference between his mortgage balance and the sale price. For both seller and lender, a short sale is preferable to foreclosure, which severely damages the mortgage holder’s credit and leads to heavy lender losses. Due to the complicated nature of the short sale, however, it is often considered an unpleasant process for all parties involved.

To begin the mortgage short sale process, the borrower must submit a range of documentation to the lender demonstrating an inability to make repayments. This might include bank statements and records of all assets as well as a description of the circumstances which led to any present financial hardship. Also useful is an analysis of comparable property prices for the property’s area, which can help prove that overall market values have declined. In addition, the borrower might furnish a summary of all debts owed along with the projected sale price of the property, demonstrating that his debts outweigh the proceeds he will receive from the property’s sale.

Next the borrower’s real estate agent can list the property. Any offers are first subject to preliminary approval by the seller. Once seller approval has been granted, the offer is then submitted to the lender. In a mortgage short sale situation, it is the lender who ultimately decides the minimum purchase price it is willing to accept, and either approves or denies the offer at hand. If the offer is accepted, the proceeds of the sale are directed from the buyer to the lender, with the borrower receiving nothing.

The borrower is then effectively released from his mortgage without facing foreclosure. It is important to note, though, that his credit report may still reflect that his loan was repaid for less than the agreed-upon amount. In addition, he may be required to repay any outstanding balance on his mortgage after the sale proceeds have been deducted.

While on the surface a mortgage short sale may be appealing to the buyer hoping to purchase a property at a reduced price, the sale process often involves a number of obstacles that can lead to frustration. At times parties other than the primary lender, such as second mortgage lenders, must approve the short sale, often leading to a purchase process that can be drawn out over many weeks or even months. In addition, the short sale buyer must usually purchase the property “as is,” and is thus responsible to pay for inspections and any repairs that might be needed. Those considering purchasing a short sale property might lessen potential frustration by working with an experienced real estate agent and obtaining legal advice before finalizing their purchase.