What is a Short Sale?

A Short Sale is when the owner of a home sells the home for less than what he owes on his mortgage.  To do this, the owner is required to get permission from the mortgage holder (usually a bank) to sell the home at a loss to the bank.  Since 2008, Short Sales have become more common as the value of houses have dropped in the United States.

Why Would a Bank Agree to a Short Sale?
Banks have a strong incentive to agree to a Short Sale when (1) it has become clear to the bank that the current owner of the home can no longer make his mortgage payments; and (2) foreclosing on the home and selling it at auction will likely bring less for the home than the proposed Short Sale.

Short Sale Example
Suppose a homeowner owes $300,000 on a mortgage he obtained prior to 2008 when home values were considerably higher than they are now.  Suppose that after the housing collapse his home now appraises for $200,000 and he has run into trouble making his mortgage payments.  The homeowner is four payments behind and the Bank has to decide whether to start the mortgage foreclosure process.
The homeowner realizes he is about to lose his home to foreclosure and decides to put his home up for sale before the Bank takes it and sells it at public auction.  The homeowner receives an offer on his home for $250,000.  The homeowner submits the offer to his Bank and requests that the Bank release the mortgage on the home for $250,000.  The Bank evaluates the offer, decides the offer is higher than they are likely to get at public foreclosure auction and accepts the offer even though it is $50,000 short of the total amount owed by the homeowner.

When Will a Bank Approve a Short Sale?
In general, Banks require for things to be present before they will approve a Short Sale:
(1) The home must be underwater.  This means more money is owed on the mortgage than the home is worth; and
(2) The homeowner must be facing a hardship that prevents him from making his payments under the mortgage.

It is also important to note that the Seller in a Short Sale may be required to pay income tax because the IRS may view the Short Sale as a forgiveness of debt.  Sellers may want to seek tax advice before accepting a Short Sale.

It is also important to note for the Buyer that most banks will only execute a Special Warranty Deed after a foreclosure.
© CORPUS JURIS. All rights reserved.