A short sale is a pre-foreclosure residential real estate transaction where the owner of the mortgage loan, the lender or lien holder (hereinafter sometimes “Lender”), agrees to (i) allow the home owner to sell his or her property for less than — or “short” of — the outstanding amount owed on the mortgage loan, and to (ii) release the property from the mortgage.
Homeowners who are “underwater” or “upside down” with respect to their mortgage loans, seek to sell their homes “short” to avoid the threat of foreclosure action and to lessen the credit damage that would accompany a foreclosure. Because of the “shortage”, the transaction may involve “debt forgiveness” by the Lender. But this is often preferable to the Lender compared to a foreclosure – which has costs and risks for the Lender in terms of lost payments, eviction, property maintenance, insurance, taxes, fees, and the like — or a loan modification, with the associated lack of certainty. Also, a short sale gets the non-performing mortgage loan asset off of the Lender’s financial books.