A short sale is type of deal in real estate where the purchase price is less than the outstanding loan of the homeowner. The mortgage lender or bank agrees to the reduction in the payment for the loan in consideration for the financial hardship that the debtor is undergoing. In effect, it is the homeowner who is selling his home for an amount that is less than what he still owes the lender.
The decision of the lender to allow a short sale is dependent on the financial situation of the borrower and the prevailing market conditions. The lender makes calculations on the probable selling price of the property at an auction and subtracts the carrying costs associated with a foreclosure. Thus, for the lender, a short sale is simply a business transaction that will minimize his losses.
For the borrower, the main advantage is that he avoids the negative repercussions of a foreclosure. A foreclosure would cause his credit score to decrease substantially, which will make it harder for him to get a loan. The derogatory entry will also remain in his credit report for 10 years. This will also prevent him from purchasing a new home for five to seven years. On the other hand, the disadvantage of a short sale for the borrower is that he will have to leave his home.
For the buyer, the primary benefit is that he is able to purchase a home at a price is lower than the market value. The potential disadvantage is that the short sale process could take a long time.
