The process where the owner can no longer afford to keep mortgage payments current, an alternative to bankruptcy or foreclosure proceedings includes short sale. A short sale in real estate occurs when the outstanding obligations (loans) against a property are greater than what the property can be sold for. The lender agrees to accept a discounted payoff (less than the total amount due), meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed in hopes of avoiding or mitigating an impending loss.
If a property is sold under a short sale, the lender may require the buyer to make up the difference, either through a personal obligation or a collection. Also, the IRS may consider debt forgiveness as income so a seller may be faced with tax ramifications.
When the short sale enters escrow, it is likely to include restrictions from the lender on closing costs and the payoff amounts to the lenders and creditors. Throughout the escrow process, the seller and real estate agent should be proactive about the numbers that the lender will see. Making sure to include every possible expense in the seller's net sheet, and to be aware of the bottom line as the process unfolds.