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How Does a Short Sale Work

Are you wondering how does a short sale work? If so, you're not alone. Many homeowners are facing foreclosure and looking for solutions that can reduce the impact to their credit. Entering into a real estate short sale agreement can be a saving grace that allows borrowers to sell their property 'short' of what is owed on their home loan and walk away.

To fully understand how does a short sale work, it is best to discuss the details with the servicing lender. Although banks follow similar protocol their policies can vary. The first step involves contacting bank loss mitigation to determine if the property and borrower qualifies for short selling.

Real estate short sale is typically reserved for borrowers who are 31 days or more delinquent on their mortgage note and do not possess the funds to pay future loan payments. However, there are instances when banks enter into a short sale agreement for properties that are not in preforeclosure.

Banks may offer the option to short sell when borrowers are current on loan payments, but facing extenuating circumstances such as death of a spouse, divorce, chronic or terminal illness, job relocation, or military deployment.

Mortgagors who fall behind with mortgage payments are assigned to a bank loss mitigator who will work with them throughout the short sale process. If the loss mitigator feels a short sale is the best solution, borrowers will be required to submit financial records and a hardship letter.

The letter of hardship is a crucial element in obtaining short sale approval. Short sale hardship letters allow borrowers to provide lenders with a timeline of events that caused their financial problems. Hardship letters also provide borrowers with the opportunity to inform lenders of action taken to remedy financial problems. Banks tend to favor borrowers who are proactive in resolving financial difficulties.

Mortgage lenders often require borrowers to have a prequalified buyer in place before granting short sale approval. Others give borrowers time to list their home for sale through a realtor. Buyers of short sale real estate must obtain preapproved lending unless they intend to buy the house with cash.

Once buyers obtain financing they undergo the loan closing process. Buyers are responsible for closing costs normally associated with home mortgage financing. Common expenses include: loan application and origination fees, property appraisals and inspections, mortgage and homeowner's insurance premiums, and legal fees.

Since buyers purchase short sale real estate at discounted prices there is often a deficiency amount between the purchase price and outstanding loan balance. Banks often hold sellers accountable for the deficiency amount.

When borrowers are incapable of paying the deficiency in full, banks are permitted to obtain a court ordered judgment which is reported to the major credit bureaus. Deficiency judgments often amount to several thousand dollars and can be a devastating financial setback. Not only do borrowers lose their home they must continue paying for property they no longer own.

It is important to note that borrowers who do not arrange a payment plan can be subjected to wage garnishment until the deficiency amount is paid in full. Additionally, the judgment will decrease borrowers' credit scores and potentially prevent them from obtaining credit for several years.

When possible, it is best to negotiate with lenders to obtain a 'payment in full' agreement. This means banks accept the short sale price as payment in full toward the home loan. Borrowers may need to retain services of a real estate attorney to obtain payment in full short sale contracts.

We invite you to learn more about how the short sale process works by visiting our short sale real estate article library.

Individuals who are considering short sale negotiations or those who have obtained short sale approval may want to purchase my Short Sale Hardship Letter eBook Course which provides step-by-step details for writing a letter of hardship, along with insider details of how to improve chances of approval ten-fold. Order your copy today at