Because of their abundance in the credit crisis, many people are asking, "what is a short sale?" A short sale simply means the borrower on a mortgage is selling a home for less than what he or she owes on the mortgage. The result will be a loss for the bank. The bank approves the short sale before it occurs. In the end, all parties lose a little bit, but the strategy is designed to minimize losses.

Why Enter a Short Sale?

A borrower usually enters a short sale for two reasons. First, it is possible the home has lost value, and it cannot be sold for the original value of the mortgage. Second, it is also possible the borrower has failed to build any equity in the home. This typically occurs with interest only loans or no down payment loans.

Why Approve a Short Sale?

Banks approve short sales because they fear they will have to enter foreclosure without this option. Foreclosure is as bad for banks as it is borrowers. They have to take over the property, manage it, pay taxes on it and design the sale. They usually stand to lose less from a short sale than from a foreclosure, so many banks are open to this option in extreme cases.

blog comments powered by Disqus