"Real Estate Short Sale" During a mortgage reinstatement period it becomes clear that the property's fair market value is less than its mortgage balance due. When that happens, the real estate listing agent confronts the mortgage lender to accept a "short sale." That means the lender agrees to accept less than the mortgage balance as full payment of the mortgage.

Example:  the mortgage balance is $450,000 but recent comparable sales prices of similar nearby homes are only $422,000. If the mortgage lender agrees to a $422,000 short sale, the buyer can purchase for $28,000 less than the existing mortgage balance.

Defaulting borrowers on a short sale walks away with nothing. The borrower offsets his/her mortgage obligation without a foreclosure on his/her credit history. Keep in mind that the lender will send the borrower an IRS-1099 form showing $28,000 of a taxable debtforgiveness income.