Short Sale

Financial Dictionary -> Mortgages -> Short Sale

In real estate, a short sale is usually employed as a better solution for both, borrower and lender when the only other option is foreclosure. A short sale involves the sale of a mortgaged property at a lesser price than the outstanding balance of the borrower. Although it may seem that the lender is at a loss (the proceeds from the sale do not fully compensate for the entire outstanding balance), it is a far better and more economic option than going through an expensive foreclosure.

It may look as if the lender is doing the borrower a favor, but this statement is definitely far from the truth. The lender consents to a short sale because the loss mitigation analysis proves that this is by far less expensive than having to go through the process of foreclosure. The lending institution does not usually initiate the short sale. It is the borrower who decides whether to sell the property for less than the value of the loan balance. The borrower may consider a short sale in the instance that the lender has taken steps to initiate a foreclosure proceeding.

The Short Sale Process

The process involves both parties consenting to the short sale. As soon as the property can be sold, the borrower finds a buyer or hires a company to locate one. If the property attracts potential buyers and consequently gets sold, the foreclosure process does not have to ensue. The buyer turns over the proceeds to the lender, but still has the obligation to pay for the deficiency. Remember that the amount of money gained from the sale is actually short of the actual balance owed, but as soon as the borrower pays the difference, he is set free from any financial obligations related to the mortgage.


In some states, the lender can legally pursue the deficiency. The law sets limits as to how much the lender can pursue from the borrower. In other cases, the law prevents the lender from pursuing the borrower for any deficiency left. Therefore, the latter has the duty to seek information on what happens after the completion of the short sale. In most cases, a Chapter 7 bankruptcy can be used as a possible remedy to remove the risk involved in the deficiency.

Effect on Credit

The short sale process may have a negative impact on one's credit score, but after 18 months, the score may again gain momentum. However, if the property has been foreclosed instead, it may take years to repair the credit score. While the short sale may negatively impact the credit score for a period of time, the borrower can easily repair the damage and start all over again. Note that the success of a short sale varies from state to state and from bank to bank in the US. It all depends on the desirability of the location, the actual property involved, and many other factors.

Business Purposes

Commercial debt is commonly traded on the secondary market, naturally, for a portion of its face value and to prevent future default. This type of debt is referred to as distressed debt. Distressed securities belong to businesses or government authorities that are under bankruptcy protection, have defaulted on their obligations, or are in distress. Bank debt and bonds are the most common types of distressed securities.