A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold.
In a short sale, the mortgage holder (bank, lender) lender agrees to accept less than the balance due to financial hardship on the part of the borrower (homeowner). This negotiation is all done through the bank's loss mitigation or workout department. The home owner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the mortgage. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower's financial situation.
A short sale typically is executed to prevent foreclosure but the decision to proceed with a short sale is based on the bank's internal rules. Most often a bank will allow a short sale if they believe that it will result in a smaller loss than foreclosing since there are costs that are associated with a foreclosure. A bank will typically determine the amount of equity (or lack of), by determining the probable selling price from a Broker Price Opinion (BPO) or through an appraisal. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than the full debt amount. It can extinguish the remaining balance when a settlement is clearly indicated on the acceptance of offer.
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