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What is a short sale?
A short sale is a real estate transaction in which the property is sold to a third party for an amount that is less than the outstanding balance on the loan which is secured by that property. In order for a short sale to take place, the lender must agree to discount a loan balance due to a hardship incurred by the borrower. The home borrower sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender.
The homeowner benefits by avoiding foreclosure and thus incurring less damage to their credit rating. The lender may find that the short sale is less costly than executing foreclosure proceedings.
In the event that a homeowner is considering a short sale, they should consult with their financial specialist before having any discussions with the lender. When a lender forgives a debt, this may be treated as part of oneีs gross income, even if no actual money was received. The lender most likely will not be willing to put an agreement in writing that states that the borrower is no longer liable for the deficiency, or the amount the sale falls short of satisfying the loan balance. This is where a financial professional is almost imperative for protecting the future interests of the homeowner.
There are several criteria that a lender will consider on if and how much they are willing to discount a loan balance. This decision is based on what the lender feels is the most cost effective way to recover the largest possible amount of the outstanding loan balance. Many times a lender will favor a short sale over a foreclosure due to the cost and effort involved in executing a foreclosure.
