A short sale is started when the home-buyer (borrower) has a hardship and can no longer afford the home. The bank (or lender) has to first agree to the putting the home on the market as a "short-sale" and then accept an offer for less than what is owed.
Short sales are a benefit to the borrower and lender in that it avoids timely and costly foreclosure procedures, the home is usually left in better condition than if it was vacated or abandoned, and because the bank agrees to the short-sale offer, does not go after the borrower for the remaining balance (or deficiency).
If you are the person buying the home in a short-sale situation, you are probably getting a good deal, and your credit is not damaged by the transaction at all (given you pay as promised).
Phill & I just attended a short sale seminar today offered by Stewart Title. The time frame for a short sale is longer than buying a house which is not a short sale. When buying a shortsale property it will take 4 to 6 months to close on the property and be able to move in, so if you are in a hurry to buy a home, you probably do not want to buy in a shortsale, but if time is not an issue( 4-6 months to complete the sale). Then a shortsale could be an option.
A shortsale is when the seller is selling for less than what is owed.
The Bank has to agree to allow the sale to proceed for less than what is owed on the property.
There is a lot of paperwork to be completed by both the seller and the buyer.
It is a long difficult process, but if you have the time and patience a short sale could be an option for you to save some money on buying a property.
For the buyer there are several things to keep in mind. The bank (in almost all cases) will not make repairs to the property, they also will not (in almost all cases) help the buyer with their closing costs. The bank is looking for a pre-approved buyer that they aren't going to have to worry about not being able to close on the property at the last minute. Someone looking to buy a short sale property needs to have a pre-approval letter ready before making an offer. They also need to be aware that it is very common to take up 3 or 4 months to close on a shortsale property just because of the process it goes through along with the number of them being done in our market right now. When you make an offer on a property if you ask what lender has the current mortgage you can sometimes gauge how long the closing will take. If it's Chase or Countrywide you're probably looking at up to 6 months. If it's most of the other nationwide companies you can expect around 3-4 months. If it's a smaller more local company like BOK you could be looking around 30-45 days.
That's probably more information than you were looking for, but in short if you buy a short sale property it won't affect your credit or credit cards, and as a buyer other than the length of time to close the process is identical to buying a "regular" home.