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Shortsale real estate transactions occur when homeowners are facing foreclosure due to delinquency on their mortgage note. In essence, shortsale means the lending bank agrees to sell property for a lesser amount than is owed on the balance of the note. When lenders enter into shortsale agreements, they generally take a loss on the loan. Homeowners must be able to show justification of financial hardship to obtain shortsale approval from the mortgage holder.

A real estate shortsale is often used as an alternative for borrower's facing bankruptcy and foreclosure. When homeowners face financial hardships and fall behind on mortgage payments, they are required to work with the bank loss mitigation department. Bank loss mitigators collect and review financial paperwork provided by the debtor. The paperwork is used to determine what course of action is best for homeowners and lenders.

Some lending banks will not accept a shortsale regardless of the borrower's financial circumstances. Mortgage holders that allow shortsales require borrower's to provide extensive paperwork. Lenders must believe a shortsale will provide a smaller financial loss than foreclosure.

In order for a lender to approve a shortsale, homeowners must submit the required paperwork to the bank loss mitigator. There must be little or no equity in the home. Proof that the property is worth less than the amount of the mortgage note must be presented to the loss mitigation department. Homeowners can research comparable market reports through a real estate agent or via the Internet. Market reports will show the selling prices of comparable homes within the area and properties which have recently sold.

When preparing shortsale paperwork homeowners will need to provide a hardship letter to the bank loss mitigator. Hardship letters should be a truthful account of events which led to the borrower's financial hardship. The loss mitigator will also require copies of financial statements and tax returns, as well as proof of income and expenses.

Most lenders require a real estate agent listing agreement prior to accepting a shortsale. Additionally, lenders usually request the realtor to reduce or eliminate their commission when selling property through a shortsale agreement. Once a buyer is found, the borrower must provide a copy of the purchase agreement and proof of financing to the lender.

A shortsale will be reflected on the homeowner’s credit report. However, the negative impact of a shortsale on a credit report is less damaging than a foreclosure.