Short Sale
A short sale is when a property is sold for less than the mortgage balance with lender approval. Learn why sellers choose short sales over foreclosure.
Definition
A short sale occurs when a homeowner sells a property for less than the outstanding mortgage balance and the lender agrees to accept the reduced payoff. Sellers opt for short sales when they face financial hardship and cannot keep up with mortgage payments. The lender must approve the sale because they will incur a loss. Short sales can damage a borrower’s credit but are generally less harmful than foreclosure. Buyers may find deals in short sales but should prepare for lengthy approvals and as‑is conditions.
Why It Matters
The seller is not really the decision maker here. The lender, and sometimes a mortgage insurer or a second lienholder, has to agree to absorb a loss, which is why 90 to 120 days between mutual acceptance and closing is normal. Buyers lose rate locks waiting on that. Sellers who start the process too late get foreclosed on in the middle of the negotiation.
Examples
A homeowner owes $412,000, the house appraises at $355,000, and the servicer takes eleven weeks to decide whether it will accept the shortfall.
A buyer's 60 day rate lock expires during short sale review, and re-locking three quarters of a point higher adds about $180 to the monthly payment on a $400,000 loan.
A second mortgage holder owed $38,000 refuses to release its lien for the $3,000 the first lender allocates, and the sale collapses two days before the approval letter was due.
Tips
Ask to see the approval letter itself and read the expiration date, the required net proceeds and the deficiency language; a listing agent saying it is approved is not a document.
Buyers should keep touring and keep writing on other homes during short sale review, because nothing in the process obligates the lender to accept anything.
Sellers should push for written confirmation that the lender waives its right to pursue the remaining balance, since approving the sale and forgiving the shortfall are two separate decisions.
Related Terms
Foreclosure
Foreclosure is a legal process that allows lenders to reclaim property when borrowers default. Under...
Judicial Foreclosure
Judicial foreclosure requires court oversight to repossess property. Learn the steps lenders must fo...
Underwriting
Underwriting is the lender’s process of evaluating loan risk. Learn how underwriters assess credit, ...
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