Many people are undergoing financial struggles they never though possible a few years ago. Millions have been losing their jobs and finding their every day needs harder to meet each month, including their mortgage payments. As foreclosures reach record highs, homeowners are getting desperate to pay their mortgages or to unload their home as fast as possible. But what really happens in a short sale?

Selling Your Home on the Short

Those who are desperate to get out from under a home mortgage might consider a short sale. This type of sale allows the homeowner to essentially ask their lender to consider taking less money in a payoff than what is owed on the mortgage due to financial hardships. This type of deal is handled by the mortgage company’s Loss Mitigation department. Many people will consider a short sale as a step ahead of a foreclosure.

Lenders will typically approve the short sale if they can determine that the cost of an actual foreclosure will cost them more money than is being forgiven. If approved, the rest of the debt is supposed to be forgiven. However, a short sale often can take a long time for approval and there is no guarantee that the difference in the debt still owed will not be required to get paid back to the lender. You may go through the process and the red-tape but you can not rely on a short sale to solve all of your financial or credit problems.

What Happens to Your Credit?

Speaking of credit, it is also important to note that if you are considering a short sale to save your credit rating, you think again. On a credit report, a foreclosure and a short sale do not look much different, though a short sale will generally look a little better. Additionally the short sale will stay on a credit report for seven years. If you are involved in a short sale, make certain the lender is reporting a zero balance on your account. On occasion, lenders have been known to fail at performing this task, which can again seriously affect your credit.

If it is still possible, a better option would be to work out a deal with the lender and set up a payment plan that will help reduce your monthly payments until you are back on your feet again. By maintaining good contact with your lender, it might be better for your credit and your finances to keep making payments on your mortgage and avoid selling short of facing foreclosure.