To avoid a foreclosure on a home or other piece of property, the home may be sold by the lender to repay the mortgage. When the sales of the property are not sufficient to repay the mortgage, a short sale may occur. A short sale is when the bank, or lender, discounts the remaining balance on the mortgage, usually due to severe financial or economic restrictions on the part of the borrower.
The borrower’s financial restrictions are usually determined by the help of a Loss Mitigation professional, who can help decide if a short sale would be a better business transaction for the lender than foreclosing on the property. This is often the case when the value of the home is actually worth less than the remaining amount owed. In this case, the borrower is still responsible to pay back whatever balance remains.
There are no agencies that monitor short sales, and they are usually done as a last resort to prevent a foreclosure. This usually helps the home owner/borrower as well, since a foreclosure will not be on their credit history and, depending on the history of credit, the borrower may enter into another mortgage within 1-3 years. A short sale is usually much quicker than a foreclosure, and sometimes allows the borrower to pay back all that is owed to the lender (if stated in the contract at the time of the short sale). The borrower can also partially control the amount of loss, and may have less to pay back than in the event of a foreclosure.
The lenders have the option to accept short sale requests after a Notice of Default has been issued. However, because of recent hardships pertaining to the ongoing foreclosure crisis, lenders are now more willing to accept short sales. This provides hope for those borrowers who owe more on their mortgage than they could repay by foreclosing, these are the individuals who benefit the most from short sales.