A short sale occurs when a bank agrees to accept less than the full amount owed as satisfaction of a mortgage debt.  Simply put, if a homeowner owes more on his mortgage than his home is worth and is having difficulty making the payments, the homeowner may be able to sell his home and turn over all proceeds to the bank. Though “short” of the total amount owed, the bank may approve this amount as satisfaction of the debt.  A short sale is typically used to avoid foreclosure.

What makes a short sale different from a standard sale is the involvement of the bank or mortgage holder.  In a short sale there are two levels of approval that must be negotiated:

  1. The borrower must prove to the bank that they are financially unable to continue to make the house payments.
  2. The bank must approve of the sales price and terms.

If there are two lenders holding a first and second mortgage, the process is further complicated as the second lien holder may be less willing to approve the sale due to the limited return he will recapture.

The process sounds fairly straightforward, but unfortunately, what we’ve seen over the last two years is that there is nothing “short” about a short sale!  Banks were not prepared for the deluge of requests that began pouring onto their desks in 2008 and the time-frame for review and approval of short sale files stretched from 90 days to a year or more.

While systems have improved at some banks over the last year, successfully negotiating a short sale requires knowledge of the process, individual bank requirements, and a whole lot of tenacity.  Homeowners considering a short sale should consult with a Realtor who specializes in distressed properties.  He or she can explain all the options available, and the potential risks and benefits of the short sale.


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