Barbara's explanation is great. The only thing that I'll add is that borrowers, who are upside down (ie have mortgages that are greater than the current market value of the underlying home), don't always have to be behind in their payments. (This is a relatively recent change that is a part of the Obama Stimulis plan.) Nevertheless, the borrowers still have to do EVERYTHING that Barbara stated earlier to demonstrate their hardship.

Bill is also correct that you should work with a knowledgable agent, and I'll add that you should look for one who has lots of recent experience handling short sales.

Angie,

The support of a local real estate professional would benefit you in so many ways. One of which is using local market data to determine acceptable pricing.

As first time buyer or a fourth time buyer the process is filled with questions, most of which your agent would be able to answer for you.

Short sales, foreclosures, and traditional sales can all bring varying challenges to a transaction. Each should be measured by its own level of difficulty. There are foreclosure transactions that close easier than regular sales and short sales that can close rather easily. A good agent will be able to provide the direction you are seeking with out eliminating a property because of its label.

Good luck

A short sale occurs when the mortgage owed on a property is higher than the property's worth and the owner is in default. A simple example will help: You buy a home for $100 and have a mortgage of $80. You come upon hard times, have no savings left and can no longer pay your mortgage. You try to sell your home but it's now worth $70 so you have a shortage of $10 plus closing costs. This is a typical short sale scenario.

The bank agrees to absorb this loss, or shortage, which enables you to sell your home for $70. This point is key - the bank does not sell the house. You do. A short sale happens when the bank enables the sale by accepting this loss.

Now, to get a short sale in place, the homeowner has to apply to the bank for this - otherwise it will be a foreclosure. To do this, the owner requests a short sale workout package from the bank. He has to write a hardship letter explaining why he can't pay his mortgage and has no money to pay the difference and he has to submit income tax forms, financial account forms, etc. to prove that he needs this help. Once the bank accepts his application, his property is registered as a short sale and has a loan number given to it.

Once this happens, then and only then can the property be marketed as a short sale. With a short sale, the bank looks at their loss from the mortgage amount and will have their own appraisal done on the home so that they know what value to expect in the marketplace.

Every offer on a short sale MUST be accompanied by a preliminary closing statement and everything must have the loan number assigned by the bank on it.

Should you buy a short sale? Why not? You can get a below market price and often short sale properties are in much better condition than foreclosures. The catch is that you may have to wait 6-9 months to find out if your offer is accepted. So, you have to be patient and I advise everyone doing a short sale to consult with a real estate attorney even if you don't use attorneys to close on real estate in your area.

So a short sale occurs when there isn't enough equity in the home to cover the debt on it and the bank holding the mortgage says OK, I'll accept a loss so you can sell it.

What you want to know as a buyer is this - what is the market value for the property, what is the loan amount and what do banks typically accept off the loan amount in your area? In Bergen County banks typically will go up to 70-75% of the loan amount but I just did one where the loss was much greater. Each case is unique but if you know the above, it gives you a good sense of how things go.

It's also a good idea to have financial qualifying data with your offer and copies of bank statements showing that you have the available funds for the down payment and closing costs. The stronger a case you make that you are a guaranteed risk, the better your chances. I just had a bank take an offer that was slightly less than another because it was a fully documented cash sale as opposed to a low down payment with a mortgage offer. And the low down payment offer didn't send in documentation - the cash offer sent copies of their statements showing they had the cash.

Consider short sales - many buyers make good offers and drop out because they are frustrated by the long wait so patience can pay off. Short sales can be terrific values - you need to understand them and you need an agent who knows how to work with them.