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Homeowners struggling to pay their mortgage because of a change in life circumstances may want to sell the home and purchase a more affordable property. Those who owe more than the property’s fair market value can ask the home lender for a short sale.

Review this process and learn more about the benefits and drawbacks.

Short sale process

When the homeowner’s mortgage balance is higher than the value of the home, he or she must repay the remaining loan amount after a sale. With a short sale, the lender agrees to forgive the balance of the mortgage.

Eligibility requirements

In general, a lender will agree to a short sale if the homeowner cannot qualify for a modification or refinance. He or she must demonstrate a lasting hardship, such as job loss or illness, that has created a long-term inability to pay the mortgage. The lender may also required proof that the homeowner tried to sell the home for a higher price and was unable to do so.

Benefits of a short sale

While a short sale does decrease the homeowner’s credit score, the negative impact may be less significant than with a foreclosure. In addition, the borrower can begin living within an affordable budget and repaying debt more quickly than with a foreclosure.

Carefully preparing the lender’s application will increase the homeowner’s chances of approval for a short sale. The documents must clearly demonstrate long-term financial hardship and an inability to repay the home loan as agreed. The lender may also require the homeowner to have an offer in hand for less than the full mortgage value.