A short sale refers to the sale of a piece of real estate at a price that is insufficient to meet the current mortgage obligations recorded against the property. In other words, if the house is mortgaged for $450,000 but it is sold for only 400,000, the fact that the payoff is short by $50,000 makes this a short sale.

Lately the short sale is a practice mortgage lenders are accepting from homeowners who prove that they are unable to stop foreclosure proceedings on their homes from going forward. Although the bank stands to lose money in the short sale, the vast majority of financial institutions will accept such sales upon application by the borrower.

Although at face value this appears to be a somewhat nonsensical way of doing business for a bank, there are some bona fide reasons that make this a preferred method of dealing with defaulting loans. Essentially, there are three main reasons currently identified why banks are more willing than ever to go ahead with this kind of business deal.

1. Foreclosures are costly and lengthy procedures that drain a lot of additional funds from a bank. Since the properties sit empty for a period of time, there is the chance of vandalism that will further decrease the actual value of the real estate. A short sale avoids foreclosure proceedings and also protects the bank’s interest by keeping the real estate owner occupied until the time of sale.

2. Auction sales of foreclosed properties no longer pack in the buyers the way they used to. A softening real estate market has potential buyers making bids with desperate sellers and rather than bidding on foreclosed on properties that did not receive the care a sale minded seller would exercise. This of course forces banks to sometimes sell foreclosed properties at cut rate prices, greatly diminishing any funds they might hope to recover.

3. Asset protection is the number one goal of lending institutions that are currently suffering from the close scrutiny of the FDIC. Subprime mortgages have led to a great many banking institutions losing interested investors as their books reflect an abundance of bad debt. Short sales are the currently best loved method for making the bad debt go away and increasing the recovery of funds on properties that are headed for foreclosure.

Permitting those who simply want out of their real estate but live in an area where the real estate market has significantly softened to the point of making a profitable sale next to impossible is not the intention of the program. At the same time, those who have defaulted on their loans but have assets that could be converted to cash in order to meet the obligations of the mortgage will not be considered eligible. Banks insist that prior to applying for a short sale option, the borrower needs to have exhausted all reasonable means of curing a default. One of these options is a mortgage loan modification which you can find out more about on the site that we recommend: www.loan-modification411.com. Borrowers interested in finding out if they meet the qualifications for a short sale program should contact their lender as soon as possible before a foreclosure actually takes place.

Author's Bio: 

Krista Scruggs is an article contributor to Loan-Modification411.com. Loan-Modification411.com connects you with service providers that can help you avoid foreclosure. We have several Loan Modification companies within our network, each with their own strengths and specialties. Depending on your specific situation (the Property State, your mortgage lender, your mortgage history, your hardship, and any other unique situation you might be in), we will match you up with the right company.