How Short Sales Work

Advantages and Disadvantages of Short Sales

The most significant advantage of a short sale is that the seller can avoid foreclosure. With a foreclosure in your credit history, you have to wait at least seven years before another lender will even consider you for a mortgage, whereas a short sale only puts you on the blacklist for as little as two years [source: Weston].

Contrary to popular belief, however, short sales aren't any better for your credit score than a foreclosure. According to Fair Isaacs, the company that calculates the FICO credit score, both short sales and foreclosures will cut a 780 credit score by 140 to 160 points [source: Gaskin].

The biggest advantage for the buyer is a chance to buy a home at slightly below the fair market value without having to enter the risky foreclosure market. With a foreclosure sale, there are a number of potential nightmare scenarios, including unpaid liens on the property and owners who fight eviction [source: White].

The biggest disadvantage for the buyer is time. Short sales take much longer than a traditional home sale because the seller's mortgage lender has to give the green light. This process gets even longer if there are multiple mortgages and liens involved. Even when all of the paperwork is in order and both buyer and seller agree on a price, there is no guarantee that the lender will approve of the short sale. Buyers need to be prepared for a long and uncertain process that could end in disappointment.

Another potential disadvantage for the buyer is higher closing costs. For example, in a traditional home sale, the seller is responsible for paying for a home inspection and any related repairs. In a short sale, the seller's mortgage lender feels less pressure to negotiate, so those costs are often shouldered by the buyer [source: Freddie Mac].

At the end of the day, both the buyer and seller hope that the mortgage lender sees the advantage of a short sale over foreclosure. Foreclosures, it turns out, can be costly for lenders, too. Lenders have to take care of the maintenance of empty homes, which might include expensive repairs in addition to regular upkeep like cutting the lawns and shoveling the driveways. Lenders might also have to pay back taxes on the homes and cover the cost of auctioning or selling them [source: Guerra].

Now let's look at some expert tips on buying or selling a home through a short sale.