Traditionally, when someone is selling a house but still has a mortgage loan on that home, they will be seeking to get at least the balance of the loan in return. Many sellers are looking to make a profit, so they price the house even higher.
But a short sale is when the opposite happens. The home is sold for less than the balance of the mortgage. This may mean that a portion of that mortgage goes unpaid, so why would a lender approve a short sale? After all, lenders typically have to sign off on these before they are permitted to go through.
Avoiding foreclosure
Sales are often approved in situations where the lender knows that the borrower is not going to pay. Say that someone has lost their job, so they can no longer afford their mortgage. They are starting to miss their monthly payments, and there is no indication they will make them in the future.
The lender could foreclose, but that can be a lengthy process that takes months. It can also be rather expensive.
The lender may determine that it is more cost-effective to accept an offer for less than the balance, rather than going through the time and expense of foreclosing on the home and then reselling it. After all, banks typically do not keep homes for long, but simply seek to sell them as quickly as they can. A short sale speeds this process up, which can be beneficial to the lender and may actually be more cost-effective than foreclosing on the home and selling it for the maximum value.
Short sales can be a bit complex, and there are certain restrictions and regulations that apply. It is important for those involved to understand their legal options.
