How can you buy a home in a short sale?

With so many homeowners unable to pay their mortgages, some have turned to unconventional solutions like short sales to prevent foreclosure. See more real estate pictures.

During the housing crisis that began in 2006 and 2007, a new term began to bubble up in the public consciousness. With so many homeowners unable to pay their mortgages, some began to turn to unconventional solutions like short sales to prevent foreclosure. A short sale is a real estate transaction that involves a homeowner getting permission from their lender to sell a house to a perspective buyer for less than the total value of the loan [source: Fontinelle]. The transaction is between the buyer and the seller, but it requires approval from the lender, who will forgive the unpaid balance and take a loss in order to get the troubled property off its books.

Lenders often make these deals when an owner has defaulted, to avoid foreclosure proceedings. For lenders, foreclosures involve making repairs, listing and marketing the homes for sale, and sometimes even evicting reluctant homeowners. All of that costs money, so if the lender thinks it can ultimately reduce costs by agreeing to a short sale, it will [source: Dempsey]. Short sales can also make a lender's financial performance seem more attractive to investors, since they aren't listed as foreclosures on lender balance sheets [source: Dempsey]. Of course, sellers would much rather make a short sale than go through foreclosure, because it is much less damaging to their credit, and buyers can benefit by getting a below-market price for a home [Source: Fontinelle].

But short sales aren't necessarily win-win situations. Lenders can be reluctant to accept them because they are guaranteed to lose money, by definition. Depending on the property and the condition of the local real estate market, the lender may choose to foreclose, instead, and try to make a profit by selling the house at auction. If you want to buy a home as a short sale, you need to convince the lender that it's a better idea for them to lose money in the short term instead of investing in a potential liability [source: Dempsey]. Making that case is a long process that involves large amounts of documentation and paperwork on your part. On top of that, short sales are always "as-is" transactions. So, once the sale goes through, you as the buyer have to pay for all needed repairs [source: Foust].

Short sales are definitely not for the faint of heart. But if you are in the market for a home and willing to sweat a little to save some money, read on to find out how to make a short sale application.