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What is a short sale? Five things you need to know.

Is a foreclosure staring you in the face? For many Americans faced with foreclosure and, possibly, bankruptcy, a better option is often a short sale. Short sales, which are up 10 percent from the same period last year, according to RealtyTrac, are becoming an increasingly popular way to deal with homes and homeowners burdened with too much debt. However, many homeowners still aren’t clear what a short sale is and whether it is the best solution for them. Here are five things you need to know about short sales: 

- Mike CuevasContributor

A brand-new $1.1 million, 5,200 square foot home in Davie, Fla., is offered for short sale in this 2010 file photo. Often, lenders will agree to take a loss on a short sale because they would lose even more in a foreclosure. (J Pat Carter/AP/File)

1. What is a short sale?

Very simply, a short sale is when a lender agrees to take less than what he’s owed and allows homeowners to sell their property because they are facing financial hardship. Typically, the homeowner's mortgage is worth more than his home and he's having trouble making payments. So the homeowner sells the home and the bank marks down the value of the mortgage to the sales price, leaving the homeowner free and clear.

Lenders agree to do this because it makes financial sense for them. According to recent statistics, homes offered as short sales are bought for roughly 20 percent below their market value as opposed to 39 percent under market value for foreclosed homes. Lenders also save on costly foreclosure and maintenance procedures. Thus, the short sale is typically a better option for the lender as well as the seller. 


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