In real estate, a short sale takes place when the purchase price won’t cover the mortgage debt. If Al Jones bought a house for $200,000 in 2005, with a $175,000 mortgage, and he can sell the house now for $150,000, this transaction would result in a loss of more than $25,000 for the lender. In order for such a short sale to go through, the lender must agree.
Even if the holder of a first mortgage on the home agrees to a short sale, the holder of a second mortgage might balk. In the above example, the bank that made Al Jones a $175,000 first mortgage loan might get back nearly $150,000 on the short sale but the holder of the second mortgage could get nothing.
In the aftermath of the housing bust, though, short sales are increasing, in part because of new government programs. For example, the Home Affordable Foreclosure Alternatives (HAFA) program was just introduced in April. HAFA is a federal program that will provide cash incentives to first and second mortgage holders who approve short sales. Under HAFA, mortgage lenders must inform homeowners of the lowest price they will accept, then respond to a homeowner’s request within 10 days. If you’re shopping for a home, the chance of buying one with a short sale has increased.
