What Is the Definition of Short Sale Foreclosure?

If you're facing the threat of a foreclosure that could wreck your credit score and leave you with no place to live, a short sale can be a good option. But what is a short sale?

Definition of a Short Sale

A short sale occurs when a third party agrees to purchase a property for what is owed on the mortgage. The agreement must be approved by the lending institution.

Buyer's Benefits

Short-sale buyers are able to purchase the property for less than its market value. Buyers frequently are investors, who turn around and sell the property for a profit or use it as a source of rental income.

Seller's Benefits

Homeowners benefit by escaping the threat of foreclosure with only minimal damage to their credit score. They also usually do not have to fear a deficiency judgment, as they would if the sales price at auction were lower than the mortgage balance.

Lender's Benefits

Lenders aren't always able to sell properties at auctions, and they must put them on the market to recoup their losses. The short sale allows them to forgo these steps and get back at least part of what they are owed.

Time Frame

A short sale usually is done when the property is in pre-foreclosure, which begins when the owner, the public and/or the courts are notified of the lender's intention to foreclose. The length of time between the pre-foreclosure and the foreclosure differs from state to state.

Drawbacks

While the short sale may seem to have many benefits for all involved, there are some disadvantages as well. Completing the process is going to require a lot of paperwork, and banks can be slow to respond to offers, leaving the homeowner and potential buyer in a state of limbo.
Some homeowners may also be required to pay taxes on any amount of the mortgage that is forgiven by the lender under the agreement.