The basic Wikipedia definition of a Short Sale is as follows:

A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold.

In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank’s loss mitigation or workout department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower’s financial situation.

Those who are not familiar with short sales tend to forget those three little words up there “but not always.”

Many people have been caught off guard with the changes that some lenders have made in their short sale policy. One lender in particular, Bank of America, has recently changed the wording in their short-sale agreement and the changes could have far reaching impact on borrowers that are looking at a short sale as an alternative to foreclosure or bankruptcy.

This new change in wording, which was recently and quietly added by Bank of America, could actually end up throwing many more homeowners into foreclosure or personal bankruptcy because they are not in a proper financial position to take on that amount of unsecured debt.

Some who have recently entered into the short sale process have been surprised by the outcome. Most people think that if the bank signs the short sale agreement that the bank is going to absorb the loss on the loan. That may have been true with some banks in the past but all this new wording is aiming to make it a “win win” situation for the banks. The bank gets the property off their books and still has the borrower on the hook for the difference.

What this means in simple terms is that if you owe $450,000 on your home and you complete a short sale for $400,000, you would be liable for that $50,000 difference. For most people this is not a viable option so they would probably be forced to let the bank take back their property (AKA foreclosure) or go through with the short sale and file personal bankruptcy. Neither of these solutions is good for the borrower or in my opinion the bank.

So if you are thinking about a short sale to try to get out of a bad situation, read the fine print of the short sale agreement from your lender so your situation doesn’t go from bad to worse.