What is and is not a Short Sale?

There are a lot of words being thrown around today that require clarification.  These include short sales, pre-foreclosure, foreclosure, sub-prime loans, deficiency judgments and taxes on the debt or deficiency. 

The information below defines these terms and explains ways to deal with financial distress through short sales.  Also outlined are the real differences between short sales and foreclosures so that homeowners can see the true benefits of a short sale.

A bank-owned house, or Foreclosure, is not a short sale.  A seller deciding to lower their price and take less profit is not a short sale.  To have a short sale, one of the parties has to be “shorted;” either the seller or the bank, and for the owner to qualify, a number of criteria must be met (see below).

A “short sale” occurs when the homeowner gets an agreement from the mortgage company to accept less than the full balance of the loan at closing.  The homeowner closes on the property and the property is “sold short.”  This occurs prior to a property entering the foreclosure process.

How Does A Homeowner Qualify for a Short Sale?

There are four criteria a homeowner must meet to qualify for consideration by the lender for a short sale.  These are:

• There must be a demonstrable financial hardship, e.g., a lost job or material change in the financial situation;

• There must be a monthly shortfall;

• There must be insolvency, meaning that the owner does not have the money to pay down the mortgage; and

• The owner does not have any assets to sell to pay for the shortfall.

What is Considered an Acceptable Hardship to Qualify for a Short Sale?

There must be a hardship that is preventing the owner from being able to pay their mortgage.  Examples include: 

• Loss of job
• Business failure
• Damage to property
• Death of a spouse
• Death of family members
• Severe illness
• Divorce
• Mandatory job relocation,
• Medical bills
• Military service
• Payment increase or Mortgage adjustment
• Insurance or tax increase
• Reduced income
• Separation
• Too much debt
• Incarceration

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