What is a Short Sale on a House?

In real estate, a short sale is when an offer is made at a price lower than what is owed on a homeowner's mortgage. Typically, a short sale occurs when a homeowner has financial difficulties and needs to sell the property before the lender forecloses it.

Short sale results in the lender receiving all of the proceeds. Lenders can then choose between forgiving the remaining balance or pursuing a deficiency judgment. Deficiency judgment requires the former homeowner to pay the lender the remaining difference either fully or partially. However, some states have made it obligatory for the lender to forgive the remaining difference.

Short Sale vs Foreclosure:

Whether you own an underwater home or have fallen behind on your mortgage payments, short sales or foreclosures are possible outcomes for homeowners. Both cases force the homeowner to give up his or her home, but the timeline and consequences are different.

How Does a Foreclosure Work?

Foreclosure involves the lender alone and usually consumes lesser time than a short sale. It is solely initiated by the lender who repossesses the home. The main intent of a lender while foreclosing usually is to earn a good profit on its investment in the mortgage.

Soon after evacuating the home and repossessing it, the lender can immediately put up the home for sale or even put it forward for auction. It can take two to seven years for homeowners who experience foreclosure to purchase another home. There is a seven-year period during which a foreclosure will remain on a person's credit report.

How Does a Short Sale Work?

Short sales usually allow distressed homeowners to stay in their homes. It is possible for homeowners who have gone through a short sale to buy another home immediately after the sale, as long as certain restrictions are met.

A short sale is a lengthy process, which is more labor-intensive than a foreclosure, which essentially allows you to walk away from your home, albeit with serious financial consequences. Although short sales require more work, the payoff may be worth it.