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How a Short Sale Works for Homeowners Facing Foreclosure

By Javier Lavagnino, Esq. on May 14, 2009 | Last updated on March 21, 2019

The AP today reported that the White House is expanding its mortgage aid program, adding some new options for homeowners to avoid a foreclosure. According to the story, the "new initiatives are expected to streamline the process of selling a home that is worth less than the mortgage, or transfer ownership of a home to the lender." What that first option is actually referring to is what is commonly called a "short sale", which can be one alternative to foreclosure (and/or bankruptcy) for homeowners who are unable to keep their home via mortgage modification or similar options.

As suggested, short sales are when homeowners sell a home for less than the amount they owe on the mortgage, and their lender typically forgives the amount "short". Of course, short sales can only be done with the approval of a lender, which probably leads anyone to wonder why a lender would possibly agree to getting shortchanged. These days, there actually may be many reasons, as the government continues to take steps to prevent rising foreclosures.

First off, foreclosure is an expensive process for lenders, and depending on the circumstances, this alone might be enough of a reason for a lender to allow a short sale. Also, as government programs start to take effect, lenders may get incentives in exchange for faciliting short sales and other foreclosure alternatives on qualified loans that cannot be modified under the government's initiatives. Homeowners who are having difficulty making their mortgage payments or are facing the prospect of foreclosure should not hesitate to contact their lender for information on the options available to them, and may also wish to contact a local real estate attorney for advice. The links below also provide more information and resources on this and related topics.

As a final note, going through with a short sale isn't without consequences. Homeowners who take that step will take a hit to their credit score, although it typically won't be as bad as a foreclosure, and certainly not as bad as a bankruptcy. There may also be tax implications in a short sale that are best discussed with an attorney or tax professional.

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