How Does a Short Sale Work?

Short sales are any sales in which the seller is “upside down” such that the amount owed to the mortgage lender exceeds the market value of the property, and selling the property falls “short” of what the lien holder owes. Creditors usually require a borrower to prove their economic hardship or inability to repay the loan to qualify for a short sale. A borrower usually must put together a persuasive letter explaining the reason for the short sale.

In contrast to other states, in California, if the lien holder agrees to release the existing lien and accept less than the debt, there will be no “deficiency judgment” after the sale for the lender to pursue. This is a relatively new law that applies to first trust deeds, second trust deeds, and other junior trust deeds.

The proceeds from the short sale will be used to pay off as much of the mortgage as possible. If there are multiple mortgages, all of the creditors must approve the short sale if they are being asked to take less than the amount owed. Larger creditors will have already defined the criteria for approving the terms of the sale.

Even when a creditor is experienced at reviewing short sale applications, the process of approval can take several months from start to finish. If you are thinking about applying for a short sale, you should consult with an attorney as well as your tax consultant immediately to make sure that this is the right decision given your particular objectives.

When is a Short Sale the Right Decision?

Under certain circumstances, a short sale may present a better choice than foreclosure, even if you still have to declare bankruptcy. While creditors in the near future will be able to see your foreclosure, they will not necessarily know about a short sale. If a creditor reports the debt reduction to credit reporting agencies, however, a short sale can affect your credit report.