When a lender releases an existing mortgage for a payoff that is less or ‘short’ of the total amount due, the transaction is called a ‘short sale.’ Lenders sometimes accept short sales as an alternative to repossession and foreclosure, which can be expensive.
Likewise, a short sale avoids foreclosure and credit-rating reductions for the seller. Short sales may be prompted by a seller’s inability to make payments, or the property value dropping below the mortgage balance – ‘underwater’ – or possibly both.
Short sales are usually initiated by the homeowner, but lender approval is required to proceed. Buyers typically negotiate short sales with sellers, but lender approval is also required to finalize a short sale. Short sales are more complex and may take longer than conventional purchases.
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