Sometimes also referred to as a real estate short pay-off or a pre-foreclosure workout, a short sale is an agreement with a lender to accept less than the amount owed by a borrower via a sale of the property to a third party.
Facing a situation in which the property value decreased and can’t be sold for the amount owed on the mortgage, the lender may make a deal to sell the home for whatever it will get on the market. If the sale price is less than the amount remaining on the mortgage, then the lender will get the proceeds and discharge the remaining debt.
Even though the delinquent mortgage will still have a negative impact on the seller’s credit rating, at least short sellers avoid credit reports showing “debt discharged due to foreclosure”.
Having a foreclosure on your credit report is the worst strike, after bankruptcy, and can reduce your credit score by more than 250 points. Instead, short sales show up on a credit report as a “pre-foreclosure in redemption” status and can result in a credit score reduction of 100 points or less. After the sale, the mortgage may show up as “discharged.”
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