When a homeowner is in financial trouble and can not keep up with his/her mortgage, a real estate short sale is a method of avoiding foreclosure. It's called a "SHORT SALE" because the homeowner not only can't pay the mortgage but also owes more than the house is worth (making selling the home in the traditional way impossible). In order to find out if a homeowner is eligible, they usually submit an application to their lender. Then, when the homeowner receives and offer it is forwarded to the lender for review and an approval/rejection is decided by the lender (this is why you see the words "3rd party approval required" associated with short sale listings). The lender's review process can be lengthy.
So, why would a lender want to allow a short sale?? Its a way for them to regain some of the costs on a nonperforming loan and it may be better than foreclosure for the lender because there can be substantial costs involved in that process as well. Not all homeowners qualify for a short sale and it depends on the lender's guidelines and many financial factors.
Also known as pre-foreclosure sale, short sale is a great way to avoid foreclosure. Compared to a foreclosure, a short sale has a lower negative affect on the credit score of a homeowner. It lowers the credit score of a homeowner by 75-80 points. On the other hand, a foreclosure lowers the credit score by 250 points. I personally feel that when a homeowner is in mortgage default, he or she should immediately apply for a short sale and avoid foreclosure. However, similar to a foreclosure, the homeowner, who borrowed the money, is responsible for paying the deficient amount resulting from the sale of the property to the lender.
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