A short sale in real estate is when a financially distressed homeowner sells his or her property for less than the amount due on the mortgage. The buyer of the property is a third party not the bank, and all proceeds from the sale go to the lender. The lender either forgives the difference or gets a deficiency judgment against the borrower requiring them to pay the lender all or part of the difference between the sale price and the original value of the mortgage. For example: If a Seller still owes a bank $200,000 on their mortgage, but they may only be able to sell the home for $175,000 on the open market, then the home and seller may qualify for a short sale, and the bank may agree to accept $175,000 as full payment.
Why would anyone agree to do this? The foreclosure process can be very lengthy and costly for the bank. It can also be very frustrating and emotionally draining for the Seller. Many homeowners who can no longer afford to keep mortgage payments current find that a short sale is the best alternative to bankruptcy or foreclosure proceedings. It may also possibly save their credit from total disaster. When lenders agree to a short sale in real estate, they are betting that they can avoid a lengthy and costly foreclosure process. It is supposed to create a win-win scenario for all parties involved.