Definition of Mortgage Short Sale

What is a "mortgage short sale" or "short sale"? What is the definition of the term "short sale"?

A "short sale" occurs when Mr. Buyer buys a house for less than what Mr. Seller owes to the bank, but Mr. Seller's bank still agrees to the transaction and agrees to release their lien on the property.

Why would a bank accept less than what they are owed on a property? To avoid the foreclosure process, which would result in extra fees for both the bank and Mr. Seller.

The difference between the money owed on the home and the money that is paid by Mr. Buyer to the bank is known as the "deficiency balance".

Sellers are not necessarily off the hook when they sell the home - there are a few things that can happen in regards to the "deficiency balance":

1. The bank may agree to cancel the entire balance owing (obviously this would be optimal for Mr. Seller).

2. The bank may require Mr. Seller to sign a promissory note for the remaining "deficiency balance".

3. The bank may go after Mr. Seller for the balance once the transaction has closed.

If are you on the selling end of a short sale, you need to make sure that you retain a professional that will work on your behalf and negotiate the deficiency balance.

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Let's take a look at an example of a "short sale".

Joe Smith owns a home in a depressed area of the country. Joe Smith and his family bought the home in 2006 for $179,000. Smith and his family put very little money down ($5,000), and they now owe $157,000 on the outstanding mortgage balance.

The problem? Real estate values have plummeted in the area, and the house is now only worth $124,000. Joe Smith and his family owe more on the house than what it is worth.

Another problem? Peggy Smith (Joe Smith's wife) has lost her job, and the family is having troubles making ends meet. They are behind on their mortgage payments and things are looking grim.

Michael Buyer decides that he wants to buy the house and organizes a short sale of the property. Michael Buyer and Joe Smith's bank agree that Buyer will pay the bank $128,000 for the property. The property was about to go into foreclosure.

The deficiency balance on the property will be almost $30,000, so Joe Smith and the bank will need to work out some sort of a deal - this will likely involve Smith signing an unsecured promissory note for some or all of the balance owing.

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