A short sale is when someone has defaulted on their original loan, and the lender is prepared to allow them to sell their property at less than the full value of the outstanding mortgage. The lender offers this kind of arrangement because it enables them to cut their costs on managing an outstanding loan that is not being repaid. It also benefits the seller, because they reduce their overall debt and thus reduce the interest outstanding and avoid additional charges being levied by the lender.
In general lenders approve this mechanism of sale when the debtor can prove that they do not have the financial wherewithal to continue to service their existing debt. This means that the lender has no real chance of recovering the balance as long as the creditor remains in their current financial position. The lender often uses a special team to make an assessment of these circumstances known as a Broker Opinion of Value (BOV). The borrower will work with this team to enable them to make a full and fair evaluation of their position.
It is not always necessary for the borrower to be in default on the loan, for a bank to allow a short sale to proceed. The process is not always a short one, and despite the impact of the recent financial crisis – it may take several months for a short sale to be approved.
It can be difficult for a short sale to be approved in the case where there are multiple secured debts on the home, as each individual creditor needs to approve the short sale and each has the right of veto for the process.
In most cases if the borrower has taken out mortgage insurance, the insurance provider will also need to be part of the negotiation as it is likely they will be asked to make up the shortfall on the sale against the original loan value.
