A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's Loss mitigation department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Most Short Sales leave a deficiency balance for which the Mortgagor / Borrower is still liable. In 99% of all cases it is not a settlement-in-full. A deficiency balance will remain while the mortgage broker, real estate agent / broker, loan officers, title and closing agents still remain getting their profit. And no regulatory agency governs this hybrid transaction.

Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation.

A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Additionally, a short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Short sales are common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense or is economically not feasible to retain an asset businesses default on their loans (called bonds). It is not uncommon for business bonds to trade on the after-market for a small fraction of their face value in realization of the likelihood of these future defaults.

 

Short Sale	Issue	Foreclosure
A homeowner who successfully negotiates and closes a short sale may be eligible for a Fannie Mae backed mortgage within 2 years. Some individual lenders are treating this as a foreclosure and are requiring 4 years or more to prove eligibility.	Future Fannie Mae Loan -Primary Residence-	A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5-7years.
An investor who successfully negotiates And closes a short sale will be eligible for a Fannie Mae backed investment Mortgage after only 2 years.	Future Fannie Mae Loan -Non Primary-	An investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.
There is no similar declaration or question regarding a short sale.	Future Loan with any Mortgage Company	On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks "Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?" This will affect future rates.
Only late payments on mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sales effect can be as brief as 12-18 months.	Credit Score	Score may be lowered anywhere from 100-300 points. Typically will affect score for over 3 years. A new credit scoring model is going into effect late 2009 and could change how the credit score is affected.
Short Sale is not reported on a credit history. There is no specific reporting item for ?Short Sale. The loan is typically reported as ?paid in full, settled or ?settled for a lesser amount. In some cases, a balance is still showing as being owed (deficiency amount). In this case, the balance needs to be paid before new financing will be available.	Credit History	Foreclosure will remain as a public record on a persons credit history for 10 years or more.
A short sale on its own does not challenge most security clearances.	Security Clearances	Foreclosure is the most challenging issue against a security clearance, outside of a conviction of a serious misdemeanor or felony. If a client has a Foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance - in most cases clearance will be revoked and the position will be terminated.