Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Mortgage Short Sale

What it is:

A mortgage short sale is the sale of a mortgaged property for less than the remaining value of the mortgage itself.

How it works (Example):

In a weak housing market, it is common for the outstanding mortgage balance on a property to exceed the market value of the property itself. In such cases, a property owner may ask the lender to agree to a mortgage short sale. If the lender agrees, the property is sold for its market value and the proceeds are used to repay as much of the mortgage balance as possible. In such an arrangement, the lender agrees to discount the remaining mortgage balance. 

For example, suppose Bob wishes to sell his home once he discovers that its value has fallen significantly below the $100,000 mortgage balance. He puts the home on the market and gets an offer of $75,000. If the lender agrees to the transaction, Bob turns over all $75,000 of the sales proceeds to the bank, and the bank then writes off the $25,000 balance that remains.

Why it Matters:

Mortgage short sales can be a good option for homeowners who are underwater on their mortgage. Generally speaking, a lender will absolve the homeowner from any additional obligation once the short sale is completed.

In a mortgage short sale, the lender realizes a loss on the amount of the mortgage that does not get repaid. When this happens on a large scale, the underlying stability of the banking sector can be shaken.