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What Is a Short Sale?

Learn about short sales in this Howcast finance video with Gregory McGraime.


A short sale is when the lender of a mortgage is allowing the owner of the home to sell that property for an amount that is less than what they really owe. And let me give you a specific example to show what this means cause I know it can be confusing.

Let's say I owe $300,000 for a home and now its not worth that anymore. Maybe the home is only worth $200,000. So you see where I'm in this situation that I'm up-side-down on the property. I owe $300,000 and it's only worth $200,000. But I'm on a hook to the bank to or the lender for the full loan amount. So a short sale is where the home owner speaks with the lender and the lender agrees to sell that home at a price less than what the person really owes. So for example, in that example I used, I owe $300,000 as a homeowner but the home is only worth $200,000, that lender says its OK you can do a short sell and sell that home maybe for $200,000 as a way of getting that borrower out of that home so that they can move on with their financial life. And it also limits the risk to that bank because the longer that someone is not able to make payments and the further that process goes in the foreclosure process. The less money the lender or bank will may able to recoup. So its kind of a way of a compromise, if you will, between the homeowner and the lender.

So this can be a good strategy for someone to get out of their home, but you also have to be aware of other conditions that may come into play. Is that loan that was forgiven by the bank taxable? It could be or could not be. Are you on the hook for any of that money potentially to the lender in some date in the future? So these are some of the other areas that you may want to review with them before moving forward with the short sale.

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