What is a Short Sale?
 A short sale is the process by which a homeowner can sell a house for less money than he actually owes on the mortgage(s).  This is done by the buyer or investor providing proper documentation to the mortgage lenders to convince them to reduce the mortgage balance to allow the sale.  The mortgage lender (or bank) actually takes a loss (or write-off) on the mortgage because the value of the home has fallen below the mortgage balance AND the homeowner is in a poor financial condition that will not allow him to continue to pay on time.
If the bank approves the discount on the mortgage, the home can be sold for a lower price without the seller having to come up with cash to cover the shortfall, and the mortgage is satisfied and the foreclosure process stops.

What type of situation is the short sale best for?
Most short sales are done on properties in preforeclosure. This means the homeowner is at least 3 payments behind and the foreclosure suit has been filed by one of the mortgage lenders.  Recently, more mortgages that are simply behind or "in default" are considered short sale candidates without actually being in foreclosure.
Also, the homeowner typically has negative equity or no equity in the home.  In other words, the total balance owed on the mortgages is equal or greater than the price at which the house can be sold.  This situation is growing increasingly common due to the easy availability of 100% mortgages (no money down) as well as the recent decline in prices. This is particularly prevalent in the Detroit area, which has a large glut of homes for sale and where prices have declined 10%-30% in the past year.
In addition, the homeowner must have some type of financial hardship that is preventing him from paying the mortgage.  This is commonly job loss, medical bills, disability, or some other hardship.

A typical situation for a short sale is this:

• Homeowner purchases a home for $100,000 in 2003 for 5% down payment, the mortgage balance is $95,000.
• By 2004, the home's value has increased and interest rates have declined so the homeowner refinances to pull cash out.  Home value $120,000, new mortgage $120,000.
• In 2005, homeowner gets laid off and continues to make payments from savings, hoping to land a new job soon.
• By 2006, savings are gone and still no job.  Homeowner begins to miss payments and decides to sell the home for $120,000.
• As the months pass, the home has not sold because values have dropped back to $100,000 and the foreclosure process has begun.  The Real Estate Agent presses to lower the selling price to entice a buyer, however that would require the homeowner to come up with cash at closing to cover the mortgage shortfall.
• Homeowner is stuck in the house and the foreclosure is proceeding.
  

How does a homeowner benefit from a short sale?
First and foremost, it relieves the stress of being in foreclosure and being hounded by the mortgage lender; and it allows homeowners to get rid of their big mortgage payment and move on with their lives.  A short sale allows you to stop the foreclosure and get a fresh start.  In my experience, this is the primary benefit to homeowners.  They are tremendously thankful to just relieve the burden that their home and mortgage have become.

A short sale also prevents additional damage to your credit.  Having some late payments and a foreclosure filed has already done damage to your credit.  However, a completed foreclosure will do much more damage and lower your credit score tremendously. Obviously, if you have to declare bankruptcy, that is a huge black mark on your credit.  A short sale results in the mortgage actually being paid off, which reflects positively compared to a foreclosure.
Also, it is important to note that the short sale does not cost the homeowner any money.  He can remove his burden for free.

Why would a bank or mortgage lender want to do a short sale?
A common saying is that banks are in the business of lending money and do not want to own real estate.  This is slightly misleading but is essentially true.  When a bank takes a property back via foreclosure, it is a long and expensive process and often results in holding the property in their inventory as a non-performing asset.  Banks have a limit to the amount of non-performing assets they want to hold.  Once this limit is exceeded, they have strong incentive to get rid of the properties at discount prices.
For a lender, doing a short sale avoids many of the costs associated with the foreclosure process.   Attorney fees, delays from borrower bankruptcy, damage to the property, costs associated with resale, property tax, insurance, etc. all must be paid by the bank during a foreclosure.  In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster.

Will a short sale “save my house”?
In the sense that you will be able to continue to live in the house, unfortunately the honest answer is no.  A short sale is only done involving a legitimate sale of the home from the foreclosed owner to another unrelated party.  
Many of the cards and letters you have gotten have probably promised to save your house, however this is very seldom possible.  I would
recommend that you NEVER pay any money upfront or sign away your deed to someone who promises to “save your house” from foreclosure.  It is probably a scam.

Will a short sale “save my credit”?
The short answer is yes and no, a short sale can save you from the worst credit disasters.

By defaulting on mortgage payments and having a foreclosure filed against your property, you have already done damage to your credit.  Your credit score has declined and those negatives will stay on your credit report for some time.  However, it will get much worse if you allow the foreclosure to continue and do not try to short sale the property.

Once a foreclosed property is sold at auction, your credit score is further reduced and when the foreclosure is completed via eviction and repossession of the home, your credit will be even further damaged.  If you can complete the short sale BEFORE either of these takes place, then you can prevent that further damage to your credit.  In addition, when the short sale is completed, it shows up on your credit as a “Paid” mortgage and a canceled foreclosure, which shows future creditors that you did take care of your obligations.

If your situation eventually winds up in bankruptcy, then that is the worst item that could appear on your credit report and it will remain there for years and cause numerous difficulties in getting future credit.  A short sale can help avoid this, but the key is not to wait  

I am in foreclosure, is a short sale for me or do I qualify for a short sale?
Each situation is different and must be evaluated individually.  If you believe you fit the basic criteria of:

1. Property in foreclosure or default
2.  Personal financial hardship
3.  Little or no equity in the property
4. At least 60 days until eviction date
   

I am NOT in foreclosure and I have missed NO PAYMENTS, can a short sale work for me or do I qualify for a short sale?

It is difficult to do a short sale if foreclosure has not been filed but it is possible if a couple of payments have been missed and there is a good hardship story.  The lender must be convinced that they will NOT BE REPAID without the short sale.

If you are not in foreclosure and you have not missed any payments, a short sale is probably not likely, but it is possible.  The Key is to have a legitimate financial hardship that will keep you from making the payments.  A short sale is not just an easy way out of a bad investment.  If you are working and your house has just lost some value, that is just unfortunately a bad investment and you are responsible to pay the shortfall.  

Short sales are when lenders agree to discount a mortgage for someone who has had legitimate hardships and who has little chance of paying the amount owed.  You may be hearing stories that mortgage companies are hurting and they don't want these houses and are giving big discounts away.  These stories are mostly urban myths and are not true.  In fact, the opposite is happening.  Since profits are down, lenders are getting tougher when negotiating prices.  They are not letting properties go cheaply and without very good reason.  They will try ANYTHING to get you to repay the mortgage in full.  A short sale is only a last resort, but we do know how to get lenders to agree to a short sale.

What if my mortgage is an FHA...or  HUD...or VA mortgage?
Short sales can still be done on all these types of mortgages though each one has different criteria.  

What other options might I have at this point?
When faced with a foreclosure, some things you may be able to do are:

1. Sell your home through the normal channels
2. Bring your mortgage current by making the missed payments and paying the penalties
3. Refinance your mortgage with another lender
4. File for bankruptcy

If you can do any of the first 3, then you probably should! Those are usually the best solutions for a homeowner in foreclosure.

However, if your situation is such that your house cannot be sold for the amount owed, and you have no money to bring the payments current, and you have no equity to qualify for a refinance, then you should consider a short sale before considering option #4.
Again, I encourage you to educate yourself as much as possible about your situation and seek advice from any attorney, CPA, or Real Estate Agent you have access to about your choices.  I do caution you against paying for the advice of so-called “foreclosure work-out specialists” or other such advisers unless it is by personal recommendation.

What is "Financial Hardship" and why is it so important?
"Financial Hardship" is a critical part of the short sale equation.  No matter what you hear about banks "not in the business of owning real estate", etc., they DO NOT give homeowners a break easily.  They require GOOD REASON to give a discount for a short sale.  They have entire departments called "Loss Mitigation", which means their entire job is to reduce the loss the bank takes on a bad loan.  Giving big discounts to investors increases the loss on a bad loan, so they don't take it lightly.

The ONLY reason a lender will agree to a short sale is if they determine that the short sale will net the more money that proceeding with the foreclosure.  Understanding the homeowner's financial hardship is a big part of the lender estimating whether they will be paid in full for the mortgage.  

IF THERE IS NOT A LEGITIMATE FINANCIAL HARDSHIP, A LENDER WILL NOT SHORT SALE EVEN IF THE HOME IS WORTH LESS THAN THE MORTGAGE BALANCE.  Quite simply, the lender will make the borrower pay the shortfall if there is no hardship.  
Many homeowners try to use a short sale as a "get out of jail free" card to dump their poor investment.  Lenders will not allow this and it is a waste of time to try.  If you are employed and have some assets, but you have simply lost value on your home and want to sell, YOU PROBABLY CANNOT SHORT SALE.  If you are current on your mortgage, IT IS VERY DIFFICULT TO SHORT SALE.  Lenders need to see that you simply cannot pay them back before they will short sale.

Are some areas better for short sales than others?
Previously, some of the areas hit the hardest by foreclosures such as California, Florida, Ohio and Michigan were easier places to get short sales approved.  Lenders assess their risk partly in terms of local market conditions.  In areas where they perceive more risk (such as Metro Detroit) they are much more willing to negotiate to rid themselves of non-performing assets.

However, as the housing recession worsens and the recent "credit crunch" limits sub prime borrowing, short sales are becoming common in most areas of the US.  The foreclosure rules are very different in each state though, so timing and strategy are different depending on locale.

What do I do about my back property taxes when I do a short sale?
Just as in a normal home sale, property taxes are the responsibility of the homeowner until the date the sale is closed.  Then they become the responsibility of the buyer or investor.

If your property taxes have not been paid this will affect the negotiations between the buyer and the bank, so you must inform us or any buyer of those taxes owed.

Can I short sale my own house?
No, this would be illegal.  A short sale must be an “arms length” transaction.  You cannot short sale your own house nor can close members of your family or friends do one for you either.  

In a short sale, the lender is agreeing to discount the mortgage amount due to legitimate hardships; but not so that the homeowner can make a profit.  No money from a short sale transaction can be paid to the homeowner (seller).  Lenders will not approve any short sale in which they suspect the foreclosed homeowner will profit.

Can’t I just go down to my branch or mortgage broker and talk to them about reducing my mortgage?
Unfortunately, things don’t work that way anymore in the banking business.  Once you obtain a mortgage, it typically gets bundled with other mortgages and sold to other banks or investors.  Oftentimes, the company to which you make your payments is not even the bank who holds your mortgage; they are simply paid to “service” the loan.
Also, once you mortgage lender begins the foreclosure process, the file is turned over to a loss mitigation company so the “lending” departments or the branch no longer have anything to do with the loan.

All negotiations regarding the short sale are done between the buyer/investor and whatever loss mitigation or asset management company works for the lender.