The Mortgage Bankers Association estimates an average 250,000 homes enter into foreclosure every three months; this is approximately one in every 200 homes. When faced with a looming foreclosure possibility, the last viable option becomes the bank short sale.

Definition

A bank short sale is when the value of the mortgage (money owed on your home) is greater than the value of your home. In other words, the sale of your home would not cover the amount of money owed to the bank, and the homeowner is described as "upside-down" on his mortgage.

Process

In a short sale, the bank takes the loss by accepting a lesser amount than is officially owed on the mortgage. If your loan amount if $180,000 and the value of your home is now only $120,000, then the sale of your home will leave you still owing $60,000. If the bank agrees to accept $120,000 and consider it as a settled repayment of your mortgage, a successful short sale takes place.

Showing Hardship

A short sale approval requires an application. The homeowner must be in default of his loan to even be considered, and a hardship letter describing why a foreclosure is inevitable in the near future must be written to convince the bank that approving a short sale is more beneficial than repossessing the home in a foreclosure. The hardship must be supported by bank statements and other documents describing why you are unable to pay.

Benefits

A foreclosure is a costly and drawn-out process for banks. To repossess the home from the homeowner and eventually get around to auctioning or listing the home in an "as-is" condition will usually bring in a lower price on the same home than it would if a short sale is approved. For this reason, short sales are usually considered to be a more profitable solution to the bank.

Bank's Control and Decision

The bank reserves the right to approve or deny any short sale request. If the price is below market value, or for any other reason the bank deems worthy, a short sale can be denied and you may end up in foreclosure regardless; much of it depends on the individual bank from which your loan originated.

Source:

Real Estate Information Systems Media: Short Sale Summary

Business Week: The New Exit Strategy

Investopedia: Purchasing a Short Sale Property

Resource:

ForeclosureRadar: Short Sale Report