These days, a growing number of Americans are underwater on their mortgages. If you're struggling to keep up with your mortgage payments, and you don't want to go through the foreclosure process, you might ask your lender to approve a short sale.

A short sale is a real estate transaction that involves selling a property for less than what the owner owes on its mortgage. Lenders who approve such transactions will end up being "short" on their payoffs -- hence the name. While short sales are often preferable to foreclosure from both a homeowner and lender perspective, they don't always go smoothly. Along these lines, buyers interested in pursuing short sales should proceed with caution.

Short sale sign


How a short sale works

Homeowners who can no longer make their monthly mortgage payments, and whose properties are worth less than their outstanding mortgage balances, typically have two choices: get foreclosed upon, or attempt a short sale. To go the latter route, a lender must approve of the sale, and, before doing so, will typically need to verify that the homeowner in question truly cannot make his or her mortgage payments. Once approved, the home is listed, and buyers are allowed to bid on the property, just like a regular home sale.

Benefits of a short sale

Though short sales can be complicated in their own right, different parties stand to benefit from them. Short sales give homeowners a chance to get out of their mortgage obligations and move forward without the same impact a foreclosure might have on their credit. Lenders, meanwhile, can reduce their losses in a short sale by avoiding the legal nightmare that is the foreclosure process. Buyers can benefit from short sales as well -- namely, by gaining access to properties at a lower cost than what they might pay in a traditional sale.

What prospective buyers need to know about short sales

If you're thinking of buying a short sale property, there are a few things you should be aware of. First, the process, from start to finish, will likely take much longer than a traditional home sale, and you may have trouble securing a firm closing date until the very end.

Why the delays? First of all, a short sale can only go through when all lenders with a financial interest in the property agree to the terms of the sale. This means that if a home has any secondary lenders on top of its primary mortgage lender (as would possibly be the case if the homeowners took out a home equity line of credit), those lenders are apt to want a say in how the sale goes down. The result? Countless negotiations -- and holdups.

Furthermore, when you purchase a short sale home, you're often getting that property as is. With a traditional sale, buyers usually have some wiggle room to negotiate repairs and the like. And although this isn't always the case, homeowners who go through the short sale process do so because they're unable to keep up with their housing costs, and as such, may be more apt to neglect those properties in the first place.

If you're going to move forward with a short sale, do as much research as possible on the property you're looking to buy, and get yourself a real estate lawyer who's been through the process many times before. Though short sales can be risky and harrowing, you might end up snagging a new home at a great price as a result.

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