A short sale, by definition, is the sale of a property to a lender for less than the amount of the mortgage owed. This sale is often only permitted under extreme circumstances. The bank or mortgage lender takes into account current economic outlooks, the personal financial situation of the debtor or home-owner, the local real estate market, and the reasonable possibility that the bank will recover some, if not the entirety, of the mortgage loan. The advantages of short selling a property to the debtor are obvious. A short sale is often pursued instead of foreclosure proceedings. Thus, by short selling a property, a debtor can keep a foreclosure off of their personal credit history. Also, the difference between the original mortgage and the short sale offer, also known as the deficiency balance, is partially under the control of the debtor. This means that the debtor is free to pay back the deficiency under their own terms. Sometimes, though rare, this debt is forgiven completely.

The advantages of a short sale are less obvious for the bank or mortgage lender. These institutions are primarily concerned with recouping their financial losses on bad or risky loans. Thus, they may choose to allow a short sale if they believe that this course of action will result in a smaller financial loss than foreclosure proceeding. Whereas a foreclosure can cost the bank or mortgage institution a certain amount of money through legal fees and court proceedings, a short sale is simply an agreement between the debtor and the lending institution and entails much less hidden costs to the lending institution. Oftentimes, a short sale is the best method for the bank to guarantee at least a partial return on a bad or defaulted loan.

A short sale is a fairly common business transaction. However, lenders do not like to view these transactions as financial favors to the debtors. Rather, these institutions view these short sales as sound financial extensions of credit. When retaining an asset makes little business sense or is economically unfeasible, a business will default on their loans. If enough of these loans are defaulted on, a bank or mortgage lender can be put in dire financial straits. Thus, a short sale is utilized to reacquire these economically unfeasible assets and recoup a portion of the extended and defaulted loans. In this manner the financial institution looses only a fraction of the accumulated debt. In these types of business short sales the deficiency balance is almost always forgiven.

There are a number of steps that debtor must take in order to secure a short sale from a bank or other financial institution. Most banks require that a Notice of Default be completed. This alerts the local government of the impending default and stipulates the location, relative value, and financial history of the defaulted property. While conditions vary from bank to bank, several levels of approval are usually required. This is often a long and complicated process for the debtor. Some banks have set limits on short sales, and these restrictions can vary in amount or type. For example, many banks won’t approve a short sale if there are tax liens held against the property. However, if approved, a short sale can be a great way to relieve debt obligation without permanently affecting your credit score.