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The Fundamentals of a Short Sale

By E. E. Kane

A short sale, in real estate terms, is the sale of a house at fair market value in which the lender accepts less than the remaining loan balance to avoid foreclosure proceedings. A short sale can be the homeowner's best hope of a fresh financial start. It can also be a lengthy and stressful roller coaster ride. 

This is basically how it works. The homeowner, due to some crisis, like a divorce or job loss, experiences financial hardship. He may or may not already be in default of the mortgage, or he might see that making payments in the future is not financially possible. Alternatively, his circumstances might demand that he sell a home which is worth less now than when he secured the mortgage.

The homeowner must be in a somewhat desperate financial situation, with no savings or other assets that could make up the difference of the loan, after a short sale. He must put together a portfolio of information for the lender, including a letter of hardship pleading his case, bank statements, W-2s, a comparative market analysis (CMA), and other information proving he is not able to make future payments.

A short sale is considered a pre-foreclosure attempt to save the borrower's credit record from the trauma of foreclosure. The lender takes a loss, but might prefer the short sale over a lengthy foreclosure process. A short sale is normally anything but short, speaking in terms of time. The lender is normally better off financially with a short sale than taking possession of the property in foreclosure, but the holder of the loan requires adequate proof (read: copious paperwork) that the deal is an advantage. If a homeowner decides to go the short sale route, he is advised to act quickly - before the loan is in default, and to jump through all of the required hoops.

If the short sale is approved by the lender, and a buyer is willing and ready with an approved loan, the deal may go through. However, there may still be penalties for the seller. The lender may seek repayment for the difference on the mortgage after the sale, although in many cases the remaining debt is totally forgiven.

The best thing about a short sale for the seller is that he could walk away free of a financial burden, and his ego is less brutalized than it might have been after the horrific foreclosure process. A short sale is one last-ditch effort as foreclosure looms on the horizon, and should only be attempted with a real estate broker or lawyer experienced in short sales.