A homeowner in default of a mortgage has a few options available to them to avoid foreclosure, one of those being a bank short sale. A home short sale, unfortunately, does not refer to the amount of time it takes to sell the property. Rather, a short sale means that a lender is willing to sell the house for less than the homeowner owes on the mortgage, usually because the home is valued for less in the current market than the balance of the mortgage. This allows the bank to salvage some of the loan and keeps the homeowner from having a foreclosure on the credit record.

The Lender Side of a Short Sale

In a market where home values are declining and the inventory of homes for sale or in foreclosure is rising, banks are willing to settle for less than the full amount of the outstanding loan. A mortgage short sale saves the bank the time and expense of a foreclosure and keeps it out of the bank’s real estate owned (REO) inventory.

The Homeowner Side of a Short Sale

It is up to the homeowner to approach the lender about doing a real estate short sale. It is important to have hard numbers on hand to convince the bank that a short sale is in their best interest, too. The short sale process can be time consuming, especially if the paperwork gets stuck sitting on a lender’s desk somewhere. There are agents who specialize in selling short real estate and you would be wise to find one. An experienced short sale real estate agent can help expedite the process. Having an experienced agent is important for the buyer, as well.

A short sale does not mean the homeowner walks away clear and free after the sale. In some cases the lender will require you to sign a promissory note pay the difference between what the house sold for in the short sale and the amount owed on the loan. They are likely to work out a payment plan, essentially giving you a loan plus interest to repay. The other, and inescapable, stipulation of a short sale is the IRS considers any debt the lender forgives to be taxable income. However, a small bank loan or IRS bill beats a foreclosure any day.