A Short Sale is when you need to sell your property but the amount owed exceeds the value of the property AND you are asking the lien holder (lender) to accept less to release the lien. You are asking your lender to accept a "short" payoff so you can sell and they can avoid the expense of a foreclosure.
For example: You bought your house in 2005 and paid $250,000 for it. You mortgaged $230,000. You can no longer afford to keep the house because of a legitimate hardship. You MUST sale or you will be foreclosed on.
The property is now only worth $200,000 (Market Value). Fortunately, you have a qualified Buyer willing to pay Market Value. After the expenses involved with selling the property there will only be $180,000 left over to pay the lender.
So you either have to bring $50,000 to closing OR ask the lender to accept a "short" of $50,000 ($230,000-$180,000=$50,000). If the lender agrees you have just completed a Short Sale.
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