What Is a Short Sale?
Written by
Chris Chisholm
Edited by
Emily Gadd
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When a homeowner has gotten behind on their mortgage payments, they might do a short sale to avoid foreclosing on their home.
In a short sale, the homeowner’s lender agrees to sell the house for a loss. This happens when the purchase price is less than the current mortgage. However, this loss might be a better situation for the lender than a foreclosure.
Key Players In a Short Sale
In a regular real estate transaction, the seller needs to agree to the buyer’s price. The seller and the buyer will probably both use real estate agents to negotiate the price.
In a short sale, the homeowner’s lender needs to agree to the buyer’s price. The buyer will likely use a real estate agent who is experienced with negotiating short sales. The homeowner might also have a real estate professional negotiate with the lender on their behalf.
How Does a Short Sale Work?
The homeowner might decide to initiate a short sale when:
- Their property is worth less than what they owe (this could happen if the home is destroyed)
- They have a financial hardship that makes it too difficult to keep the property
The homeowner can contact a real estate agent to learn more about how a short sale can help them. If the homeowner and the real estate agent agree that a short sale is the best option, the real estate agent can help contact the lender.
Contact a Lender’s Loss Mitigation Department
If the homeowner is using a real estate agent, they will have to give them authorization to speak to the lender on their behalf. The lender will let the real estate agent know what requirements they have for a short sale.
List the Property
The real estate agent and the homeowner will decide how much to list the house for. However, the lender gets final say in what offers are accepted.
Accepting an Offer
If the homeowner receives an offer and accepts it, the real estate agent will bring the offer and the short sale application to the lender. Most lenders will require an explanation for the hardship the homeowner is experiencing.
The lender decides if it will accept a short sale and the offer.
This process can get more complicated if:
- The lender has already started the foreclosure process
- There are multiple loans on the property
- The lender wants to negotiate the offer
States can also have different rules around how short sales are handled.
Why People Purchase Short Sales
Like any real estate purchase, the pros and cons will depend on the specific property.
| pros | Cons |
|---|---|
| Less competition because other buyers don’t want to deal with the hassle of the process | The process is longer and more complicated than a traditional sale. |
| You might be able to get a better deal on a house in a certain area than you otherwise could. | The house might need a lot of work or be in a location where property values are falling. |
Can a Short Sale Affect Your Credit Score?
A short sale can negatively affect your credit score because it signals to lenders you weren’t able to keep up with your payments. InCharge Debt Solutions estimates that a short sale can drop your credit by 100 to 150 points.
However, it won’t hurt your credit score as much as a foreclosure.
What Is the Difference Between a Short Sale and a Foreclosure?
The difference is in which party gets the ball rolling. In a short sale, the homeowner is the one who initiates the process. In these instances, homeowners usually believe that they are so far behind on mortgage payments that they will never catch up.
A foreclosure, however, is initiated by the lender. The bank takes ownership of the home after the buyer is unable to make payments. Additionally, in most foreclosure situations, the homeowners have already abandoned the property. But if they have not, the bank will evict them during the process.
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- Rely Services. "Which Is Better For A Lender: A Short Sale Or Foreclosure?"
- Kaplan Real Estate Education. "What Is a Short Sale in Real Estate and How Do They Work?"
- InCharge Debt Solutions. "Does a Short Sale Affect Your Credit Score."
- National Association of Realtors "The Short Sale Worflow."
- New York City Bar "Short Sale"
