A short sale happens when someone owes a certain amount of money on a loan for a property, but the lender agrees to take a smaller amount. For instance, someone owes $300,000 on their mortgage, but the lender approves a short sale for someone else to buy the house for $200,000.
You can see that this means they’re not going to get as much for the home as they originally anticipated. So why would a financial lender ever accept this type of deal?
The borrower is already underwater
The person who owns the home may be underwater and they may have defaulted on their mortgage payments. Essentially, the bank realizes that they’re going to have to go through a foreclosure and re-claim the home. They also know it’s not worth as much as the loan. Rather than do all of that, they may allow a short sale. They technically do lose money on the sale, but they save money because they didn’t have to go through the foreclosure process. This also makes the whole process a lot faster than it would be otherwise.
The homeowner won’t be able to pay in the future
In some cases, short sales happen when the person is still current and hasn’t defaulted on any payments. But they may be able to show their lender that they’re not going to pay in the future due to some type of financial hardship. For instance, someone who suffers a disability and can no longer work may see such a reduction in income that they can no longer pay back what used to be an affordable mortgage.
If you are interested in short sales, the process can be complicated, so make sure you know what legal steps to take to protect your interests as either the buyer or the seller.