In your home search, you'll probably come across a home that is listed for much less than comparable properties in that area. Unless the owner is very motivated to sell, these homes are most likely short sales. Depending on your financial situation and budget, it may be a good idea to go down this route, but it's important to know all the facts before you sign on the dotted line. So, what is a short sale and how does it work?

To put it simply, a short sale is when a homeowner owes more on their mortgage than the house is actually worth. But how can this happen? It all depends on the real estate market. For example, if you bought a home for $100,000 ten years ago and have paid $20,000 into the principal, then that leaves you with $80,000 left on the mortgage. If you want to sell your home at that time, then you will need to get it appraised for at least the amount that you owe the bank. But if property values are low in the area and the home gets appraised for less than $80,000, then you are short on the mortgage amount.

photo by Neighborhoods.com

Some homeowners will wait for the housing market to get better in order to avoid a short sale, but sometimes that isn't possible. Situations like unemployment, medical expenses, family emergencies, or other financial hardships can impact a homeowner's ability to make monthly mortgage payments on time. Homeowners typically choose to sell their home as a short sale as a last resort instead of risking foreclosure. A foreclosure would be worse for the homeowner because it will damage their credit score. It may not be the best situation for the lender or homeowners, but it may be the most economical option for all parties involved.

In order for the homeowner to go through a short sale, the bank must first approve the short sale amount that the homeowners have set, which can take a long time to process. The mortgage lender also has to approve the house for a short sale by getting a hardship letter written by the homeowners who must prove that they can't make mortgage payments. Homeowners must provide proof of financial hardship by submitting bank statements and pay stubs. The bank will then consider if the short sale is a better option than a foreclosure.

But if you are in the market to buy property, you may be able to find a decent home at a low price. All you need is a lot of patience because short sales take months longer to close than regular listings on the market.