A short sale is a sale of real estate in which the proceeds from selling the property fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt.

Simply put, a short sale is the sale of an asset for less than the loan balance.

Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales.

The majority of lenders require the completion of a short sale package before giving approval. A short sale package may include a letter of hardship, two years of income tax returns, bank statements from the past two months and the homeowner's last two pay stubs. The bank may also require financial statements from investment accounts as well.

The letter of hardship must be succinct and to the point. It should state the homeowner's current income, the reasons for the hardship, the condition of the home and whether it has occupants.

A lender may consider a short sale even if the seller is current but the value has fallen. The seller may have over-encumbered, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.

Listing the house for sale with an agent prior to contacting the bank may increase chances of short sale approval.

Once the homeowner receives a Notice of Default (NOD) from the mortgage company, it is appropriate to begin short sale discussions.

Real estate regulations, practices and lender’s procedures may vary more or less when it comes to short sales, but short sale transactions have the same characteristics.

After the seller lists the property and accepts an offer from a qualified buyer, the offer goes to the lender who approves, rejects or counters the buyer's offer. The process typically takes longer than a traditional real estate transaction, and the lender may require the buyer to complete additional paperwork.

Whether you’re contemplating a short sale of your home or interested in buying a short sale house, you need to enroll help from a short sale experienced agent, accountant and/or lawyer.

If interested in buying a short sale, do your research before making an offer to purchase. Your agent can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender.

After the seller accepts the offer, the listing agent will send the following items to the bank:

Typically, the bank acknowledges receipt of the file, assigns a negotiator, orders a BPO (broker price opinion), may assign a second negotiator, after which the file is sent for review.

The bank may then require that all parties sign an Arm’s Length Affidavit before issuing the short sale approval letter.

For homeowners facing foreclosure, there is one more option they may consider apart from the short sale, and that is the deed in lieu of foreclosure.

A deed in lieu of foreclosure is a title-transferring document signed by the homeowner, notarized by a notary public and eventually recorded in the public records. It delivers title from the homeowners to the bank that holds the mortgage.

Many lenders require that you attempt to sell your home for at least three months before they will consider a deed in lieu. The lender would rather that you complete the process of selling your home, thus relieving the lender of that time-consuming responsibility. If the house does not sell in the specified time, you can proceed to a deed in lieu.

As with the short sale, as a homeowner you must provide a hardship letter to outline the circumstances. Your lender will order an appraisal of your home. Once your application is processed, you are required to sign a document that transfers title to the property to your lender, and this document must be notarized and placed in the public record. From the time you apply with your completed paperwork, it usually takes about 90 days to complete a deed in lieu.

It's also important to be aware of any tax consequences of such debt forgiveness. If this is your primary residence, you should not owe any tax on the amount forgiven. However, if it is a second home or rental property, the deficiency can be treated as income by the IRS, and you may receive a large tax bill.

From the homeowner point of view, a short sale or a deed in lieu is preferable to foreclosure for a variety of reasons.

Using either a short sale or a deed in lieu will prevent a foreclosure from appearing on the borrower's credit report, but the credit score will still suffer a negative impact. However, using one of these options may allow the borrower to obtain another mortgage loan more easily in the future.

A foreclosure listed on a credit report can lower the score up to 250 points. Additionally, it will be five years until another mortgage loan can be obtained. Since a foreclosure takes longer to process than a deed in lieu or short sale, negative marks can continue to be reported until the foreclosure is finalized.

When a deed in lieu or short sale can be agreed on, the mortgage company generally reports it as a "paid settlement." This will impact a credit score by 50 to 150 points, although, according to some sources the negative impact of the deed in lieu on the credit score is similar to that of a foreclosure.

Generally, lenders will allow for another mortgage loan two years after a short sale and four years after a deed in lieu, per the Fannie Mae and Freddie Mac guidelines.

Whether it’s a short sale or deed in lieu, specialized professional help is essential throughout the process to ensure all requirements are met and precautions taken.