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  1. Bankruptcy Glossary
  2. Short Sale

What is a Short Sale?

Short sales work best for homeowners who are facing imminent foreclosure . With foreclosures so much a part of the current housing crisis, more attention has been paid to alternatives that may help out beleaguered homeowners.

Such an alternative is a short sale, which is an agreement by homeowners and their mortgage holders to sell their home for less than the amount owed on the property. At a time when banks and mortgage companies have an unusally high number of foreclosed homes in their possession, a short sale allows them to avoid adding another to their inventory.

However, short sales are not right for every situation. They are most successful when foreclosure is imminent - homeowners are well behind in their payments or have been served a default notice. While the mortgage holder is forced to take less money than is currently owed on the home, they are likely to lose more if the foreclosed home goes to auction.

"To successfully get a short sale, you must find the homeowners who are in the second stage [default notice] of pre-foreclosure or more than three payments behind on their mortgage," according to ForeclosureUniversity.com. "Once the notice of default has been recorded, banks become motivated as well, so you are more likely to get a discount."

By selling their home in a short sale, homeowners are likely to see some damage done to their credit rating, but not as much harm as would have been caused in a foreclosure. Many people who go through a short sale are able to buy another home sooner than if their house had been foreclosed.

"A short sale will not appear on your credit report. However, the status of your loan will show up," warns ShortSalesHelp.org. "If you are in default on your loan and you complete a short sale it would be considered a redeemed pre-foreclosure. It's often shown as 'paid in full for less than agreed'.

That means that creditors and potential lenders will know that a short sale has been completed and getting another home loan is likely to be granted, but at a less desirable rate. Still, many people who go through a short sale are able to buy another home sooner than if their house had been foreclosed.

ShortSaleHelp.org suggests that consumers who are considering a short sale should consult with realtors who have experience with short sales in order to quickly move through the process.