What is a Short Sale?

The definition is simple. A short sale occurs when the lender adjusts a loan pay-off down to accommodate the sale of the property. For example, a seller might have a loan balance of $100,000 and a buyer willing to pay only $80,000. If the lender accepts the offer, he has agreed to a “short sale” the pay-off is then down $20,000.

There are many other terms describing the short sale which you might have heard. The most common terms in the industry include:

Short Pay

Compromise Sale

Write Down Sale

Negotiable Sale

Pre-Sale

Loss-prevention Sale

Don’t be confused. All these terms describe the same principle for the same transaction. The term varies from lender to lender, however, the most common name is Short Sale.

Why would a lender accept a pay-off for less than the loan balance?

Lenders must manage and mitigate their losses. The short sale option is usually a prelude and/or alternative to foreclosure. Because banks are required to maintain reserves on all properties in foreclosure, it can be financially advantageous to accept a pay-off for less than the loan amount. Remember, there must be willingness for the lender to negotiate this type of arrangement.

What situation qualifies for a short sale?

There is mainly one requirement for qualification and that is proof of hardship. Hardships are not necessarily financial.

Impending Divorce – A situation where both spouses may be able to meet the payment before divorce, neither party alone can afford the payment afterwards.

Illness – Illness where the person is unable to work and continue the loan payments.

Unemployment – A situation where the individual has inadequate income to meet his/her loan obligation.

“Hardball” – For lack of any other term, hardball refers to anyone who no longer wants the property for whatever reason and will accept the consequences whatever they maybe.

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