A real estate short sale takes place when a property owner, and their real estate lender, agree to sell the real estate property to a third party for less than what is owed to the lender.
The owner gets permission from their lender to sell a property for an amount that is less than what's owed on the property. Typically, the bank/lender looses thousands of dollars. In most cases, this process is the last step before a home owner loses their home to foreclosure. A short sale does damage credit and can consume hours of the property owners time so why would anyone elect to proceed? Because the alternative may be worse. A homeowner who is behind on mortgage payments could possibly be facing foreclosure.
If a lender agrees to a real estate short sale, the seller may still owe the lender the difference between the loan amount and the amount the property is sold for. Depending on the amount, this may still be a better choice than a foreclosure. Foreclosures, and short sales, both affect credit scores and the ability to purchase a home, but a short sale will cause less damage in both areas. With a foreclosure, a credit score can suffer 250 points or more. A short sale typically lowers the credit score about 80 points. Both processes can cause problems when the seller wants to purchase another property. It can take up to two years for lenders to offer decent interest rates after a foreclosure. Having a short sale on your record may only slow the process about 18 months before seeing good interest rate offers. Keeping a decent credit score is a big advantage to avoiding a foreclosure.
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