With the dramatic rise in the number of foreclosures over the last couple of years, short sales of homes have become a very popular technique to avoid costly foreclosures. If you are in financial trouble and face losing your home, you need to understand what a short sale entails.

A Way to Mitigate Risk

Banks are often willing to let a home be sold for a loss as a way to ensure they recuperate at least a percentage of the loan. If the borrower simply can't make the payments, banks often prefer this route than the lengthier and costly foreclosure route. Both sides benefit from this action instead of foreclosure. With a foreclosure, there are hefty fees involved and a borrower's credit is severely damaged for many years.

When both parties agree to a short sale, the borrower is stating that all funds from the sale of the home will immediately go to the lender. The lender in turn agrees to relieve the borrower of any outstanding balance that the sale price doesn't cover. This might seem to not so beneficial to the bank, but with a depressed housing market, they simply don't want the homes sitting empty earning them nothing. They are much more willing to accept a small loss, which they can write off, in return for receiving immediate funds.

If you are facing the possibility of foreclosure, you need to talk to your lender immediately to get the process rolling. Once you have reached an agreement, you can put the house on the market for the agreed upon price. Potential buyers will not only get a reduced price on the home, but also be getting a home that has not sat abandoned for a long period of time, which is often the case in foreclosed homes.

Lenders usually have departments devoted to this type of sale. They will determine what an acceptable loss is for them and work with you to achieve a viable sale price. Foreclosure should be much rarer than it is but many people wait until it is too late to do anything else. If you maintain a realistic evaluation of your finances and are proactive, you can avoid shattering your credit rating with a foreclosure.