Short sales may sound like the seller is in a big hurry to unload a home but that is not the case. Short sales refer not to a quick closing date but to a tricky financial situation. While short sale homes can be advantageous to buyers, you should also take certain measures to protect yourself. Read on to find out what a short sale home purchase means and what you can do to avoid making a big mistake.

Understanding Short Sale Situations

The word short in this term refers to being short of funds. The home value and, consequently, the amount of money the home might sell for, is less than the current mortgage on the home. Homeowners must sell their home for a price that meets or exceeds the current mortgage loan balance. Otherwise, money is owed to the lender.

How Do Short Sales Happen?

It's not natural to be "underwater" on a home loan but it can happen in one of two ways. First, if someone gets a loan and then they try to sell or refinance, they'll have to get an updated appraisal. If the appraisal reveals the home value is less than is owed to the lender. Second, homes can also lose a great deal of value by natural causes like a deteriorating neighborhood, rezoning, changes in school districts, and more.

How Buyers Should Handle a Short Sale

Some sellers are able to make deals with the lender to accept a lower pay-off amount. Surprisingly, many lenders will agree to this because it helps them avoid something even worse – dealing with a foreclosure. You may be told (or you must be told, in some locations) that the home is being sold as a short sale and that may or may not affect your decision to buy. The reason for the short sale is of prime importance. If the previous owner got too high of a loan and that resulted in a short sale situation, it might not affect the deal. If the home has steadily lost value for other reasons, however, you need to find out why that happened. Neighborhoods can rise and fall in popularity but homes with nearby hazards or problems are red flags not to buy.

If you are interested in a home that is being sold as a short sale, speak to a real estate agent about the circumstances behind the issue. A real estate agent can also help you find houses for sale in your area.