The dramatic pop of the real estate bubble left a lot of homeowners in a bad position. Some homeowners and families tightened their collective belts and struggle on to make the mortgage. Others are not as fortunate. One way that homeowners and banks have tried to combat this problem is with the real estate short sale.
A short sale is when the borrower (homeowner) sells the home for less than the outstanding balance. This is a sale to mitigate the damage (to both the borrower and the bank) in the face of impending foreclosure. The bank agrees to this because they (the bank) get the proceeds from the sale and are therefore short only the difference. This is preferable to having the home go into foreclosure, getting no money and ejecting the residents.
The first question usually asked is, “will it affect my credit like a foreclosure.” The short answer is no. Foreclosures are reported for seven years and are reported as a defaulted loan. Short sales will report as “settled for less than owed.” This is better, but that doesn’t mean that a short sale is a magic bullet. It will adversely affect a borrower’s credit, but not to the extent that a foreclosure will.
Additionally, the borrower may have to pay the difference in the sale price and the remaining balance on the home. Finally, junior lien holders may have to be consulted as interested third parties.