You may have heard of the term ’short sale’ but are not sure exactly what it is. It is a term used in relation somebody that is having difficulty repaying their mortgage. It can happen to anybody: you see your dream home, work out that if you make some economies you can afford to pay the mortgage, and agree to repay the maximum you can afford.

This is something you should try to avoid - always arrange a repayment that is some way below what you can afford, because without you doing anything wrong you may find yourself losing your home. The interest rates go up, that job promotion or raise you expected didn’t come through, or your partner leaves you after agreeing to meet part of the repayments.

Anything can happen, and before you know what is happening to you, your income falls short of what you need. Before long these letters start coming through your door and are eventually being replaced by more official ones from the debt collectors. You are behind in your mortgage, and have insufficient income to meet the standard payments, let alone the increase that has been recalculated to include your arrears. You reach a stage when you are dreading the post and try not to open it.

You might wonder why they are not more understanding, but lenders are not philanthropists, and quite rightly so because that is how they earn a living. Without them few of us could afford to purchase any high-cost item such as a car, boat or a house. They are not on your side, and you will lose your home unless you come to some arrangement, and one that many lenders agree to is a short sale.

A short sale is when you sell your property for less than the amount still owing on it. The proceeds will not be enough to repay your mortgage, but many lenders will agree to this because it saves them the high expenses involved in foreclosure. In order to sell your home in this way, and get the mortgage company off your back, you have to prove that you have no other investments that can also be realized and no cash in the bank.

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Given that is the case, then you can apply to your mortgage lender for permission to sell your property in this way and pay them what you get. If you get agreement for this, you will receive nothing from the sale because it all goes to the lender. The execution of a short sale will be permitted only if the lender feels that they will lose less money with that agreement than through a foreclosure. The bank will determine your equity, whether negative or positive (likely the former), and then come to a decision.

If the lender does agree to accept a sum less than that owed, you should try to ensure that it is in full settlement. A short sale agreement is not necessarily an agreement of full settlement, and you are not settling to complete the debt unless that is stated on the acceptance of your offer of payment.

However, if you have positive equity, you could still short sell your home for less than it is worth, but more than you owe. That is not strictly defined as a short sale, but if you can’t pay the mortgage and your home is worth a good bit more than you owe, then you can sell it short of the market price to get enough to pay the lender and you might have a grand or two left over for yourself. Otherwise, the financial cost of foreclosure would fall on you, and you could end up with nothing.

When a mortgage lender forecloses, they take possession of your property - they have it anyway until you have repaid the loan, which is why they hold the deeds and not you. They can technically sell your home for just what they need to meet the balance of your loan and leave you with nothing, irrespective of the amount of your equity. It is when you have negative equity that they might be prepared to accept a short sale.

In fact, most short sales involve selling for less than you owe and getting permission from the lender to do so. They would agree to this to avoid them the problems of foreclosure, but you have to prove beyond doubt that you have no other financial resources. No investments, bank account or savings, and that there would be no possibility of you paying any financial penalty placed on you. Then, and only then, will the lender consider that they would have to pay the full costs and agree to a short sale.

This is a legal agreement, of course, and cannot be agreed by a nod. You have to have an acceptance in your hand before you short sale, but once it is over you will owe nothing, and can start rebuilding your life again. Never, ever, commit to more than you pay, or even just what you can afford - always leave some slack for interest increases or emergencies and you will give yourself the chance of avoiding the need for such agreements.

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