What is a Mortgage Short Sale

A mortgage short sale is the sale of a property by a financially distressed borrower for less than the outstanding mortgage balance due where the proceeds from the sale will be used to repay the lender. The lender then accepts the less-than-full repayment of the mortgage (and the borrower is released from the mortgage obligation) in order to avoid what would amount to larger losses for the lender if it were to foreclose on the mortgage.

BREAKING DOWN Mortgage Short Sale

A mortgage short sale is also known as a pre-foreclosure sale. During a short sale, the borrowers sell their home for less than the balance remaining on their mortgage. If the mortgage company agrees to the short sale, the borrowers can sell their homes and use the proceeds to pay off all, or at least a portion of, the mortgage. Short selling a home can cause the borrowers' credit to take a hit. This could potentially prevent those individuals from getting another home loan for several years. 

Borrowers become short sale candidates when what they owe on their mortgage exceeds the current value of their property. Because many home buyers purchased their homes at the height of the market with zero-down financing and interest-only mortgages, plenty of those homeowners were left with a mortgage that exceeded the value of their property when home prices declined rapidly. This is why short sales have surged in the face of the recent housing downturn. 

A mortgage short sale is one of several options other than foreclosure that might be available to a financially distressed borrower. Borrowers with temporary financial problems should try to negotiate a forbearance agreement with their lender. For borrowers with more lasting financial problems, in addition to a mortgage short sale, a deed in lieu of foreclosure or a short refinance might be potential options in avoiding foreclosure.

Short sales are normally reserved for extreme cases and should only be seen as a last resort once all other options have been exhausted. They are often complicated and can take a long time to complete. They require lender approval, which isn't always a guarantee, and the borrower must find a buyer for the property. 

However, there are some pros to a short sale. If done correctly, a short sale may not do as much damage to the borrower's credit score as a foreclosure would– because of this, borrowers won't have to wait as long to purchase another home as they would have if they had gone through the foreclosure process.