What is a Short Sale?
In the event of multiple missed payments, as well as mortgage defaults, many homeowners who realize they are over their heads, and looking for a way out will engage in a short sale. But just what is a short sale?
A short sale is a way to avoid foreclosure and the record that goes along with it, as it is a carefully arranged sale which features the property being sold for less then the amount of the mortgage balance. Typically, short sales are reserved for extreme cases when the bank or lender decides that it is in their best interest to take an early loss instead of enduring costly foreclosure proceedings.
The reason foreclosures weren’t an issue in the preceding few years was due to appreciating home prices. Even if homeowners fell behind on payments, their homes would be worth more than what they bought them for, so a standard sale would be possible because they gained equity in their home beyond the mortgage balance.
Nowadays, with home prices moving sideways or dropping, homeowners aren’t so lucky. That’s why many borrowers who got into negative amortization loans or even high loan-to-value loans are finding themselves with a mortgage balance that exceeds the value of their home. Even if you put 20% down and made all your payments on time, you may have just purchased a home at exactly the wrong time, which eventually pushed your loan underwater. – Source
These short sales help resolve underwater mortgages, or mortgages where the house cost less then the money owed on it, as well as protecting both the lender and the individual seeking respite from the mortgage. A short sale still should only be used as a last resort however, because it still can damage your credit score, though not a harshly as a foreclosure