Q. What is a short sale?

A.   A short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's Loss mitigation department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale.

Q.   Why would someone choose a short sale?
A.   A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Additionally, 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 what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount.

Q. If I'm underwater on my mortgage -- if I owe more than my home is worth -- and I'm interested in pursuing a short sale, how do I get started?

A. The first thing you would want to do is get your home listed with a Realtor and determine what a fair market value for your home is. You want to price it to sell because you're in trouble, and we want to sell your home as quickly as we can.   You're going to list your home like any other transaction, but you're going to disclose in the listing and to all prospective buyers that this is a short sale. Because it's a short sale, closing dates are speculative because we need lender approval. We don't know how long it's going to take the lender to agree or give us an answer of a short sale.

Q. It must be frustrating for people. How long can this take?

A. There is no legal time limit for how long the bank can take to answer you. I've seen short sales drag on for six months. That's a long time for a buyer to wait.

Q. What do you need to get a short sale accepted?

A. The bank requires from the seller financial paperwork so the bank can determine whether they're going to grant your request. They want to see that in fact you're in financial hardship and you can't afford to keep the home anymore, that your income and your assets won't allow you to keep making payments. In this instance, they usually require a hardship letter -- they want the homeowner to explain how come they can't afford the mortgage that they agreed to accept responsibility for. Did they lose a job? Was there an illness? They want to see your bank records, your tax returns, and your income statements.

Q.   How have banks' attitudes toward short sales changed?

A.   Short sales have become very commonplace. Banks have online procedures and departments now that are devoted to short sales. Typically if they continue to wait until after foreclosure, it takes longer and they'll get less money.   If the bank waits, they foreclose. That takes time. Then they have to market the home and try to find a buyer. They have to maintain and be responsible for the property in the interim. All of that is expensive for a lender.   At the end of the day we typically see bank-owned properties sell for less than short sales do.

Q.   What if I have a second mortgage?

A.   Second mortgages are difficult because both lenders have to agree in order for the sale to take place. What happens is the first mortgage generally wants all of the money to satisfy their lien.

If there was a foreclosure, the first mortgage would get paid and the second mortgage would get anything left over, likely nothing. The first mortgage wants to allow very little to the second mortgage.

Q.  Will this affect my credit rating?

A.   A short sale does not adversely affect a person's credit report beyond documenting the short sale as "foreclosure proceedings started". But it does count against a person's credit to about the same degree as a foreclosure by similarly remaining on the report for 7 to 10 years and, most often, prevents the issuance of any mortgages for a number of years.  While it is frequent if not common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating the zero balance and settlement option on the mortgagor's credit report, or even flat refuse to do so "due to their financial loss."