A bank short sale refers to real estate that is sold for less than homeowners owe on their mortgage note. Homeowners who can no longer afford mortgage payments and are facing foreclosure must work with their lenders loss mitigation department to apply for short sale approval.

Bank short sale properties can include single family residences, mobile homes, manufactured homes, condominiums, commercial real estate and raw land. Borrowers must obtain approval from their lender prior to listing their property as a short sale.

Short sales are handled by each lender's loss mitigation division. A loss mitigator is assigned to work with borrowers throughout the short sale process. Lenders require borrowers to submit financial records, along with a short sale hardship letter and various types of legal and real estate documents.

Some banks require borrowers to have a buyer in place before entering into a short sale arrangement. Others let borrowers list their property through a realtor; giving them a few months to sell their home. In rare instances, lenders allow homeowners to list their property as "For Sale by Owner."

Once borrowers obtain short sale approval they must sell their property for a predetermined price and within a specified timeframe. The entire process usually takes four to six months to complete. Short sales can be a daunting task. Few people can engage in the process without assistance from a real estate lawyer, realtor or short sale specialist.

Not all banks engage in short sales. Those that do, require borrowers to adhere to strict guidelines. If borrowers do not follow protocol, mortgage lenders can commence with foreclosure proceedings.

According to mortgage financier, Freddie Mac, the foreclosure process costs banks around $60,000. Although lenders accept less than is owed on the mortgage note, entering into short sales allows them to avoid expenses and legal fees associated with foreclosure.

Bank short sales can be a saving grace to homeowners facing foreclosure. However, borrowers should take time to become educated about the pros and cons to determine if this is the best financial decision.

Both short sales and foreclosure have a long-term affect on borrowers' credit rating. The level of damage depends on the type of short sale offered by the lender. Some banks require borrowers to pay the difference between the home loan balance and purchase price. If borrowers are unable to pay the full amount, lenders issue a Deficiency Judgment.

Short sale deficiency judgments remain on borrowers credit reports until paid in full. The short sale difference can amount to several thousand dollars; making it nearly impossible for the borrower to repay their debt. Careful consideration should be given when lenders issue deficiency judgments. In some cases, it can be less damaging to allow properties to fall into foreclosure.

Other lenders accept the sale price as payment in full and do not persue the borrower for the balance. This is known as Payment in Full without Pursuit of Deficiency Judgment. Obviously, this is the better choice and less damaging to borrowers credit.

Distressed homeowners oftentimes throw in the towel and walk away from their property. This is the biggest mistake anyone can make. Foreclosure real estate is sold through auction at greatly reduced prices. Banks can persue the borrower for the difference between the sale price and loan balance.

Foreclosure remains on credit reports for ten years, while short sales are reflected for seven years. Borrowers who obtain payment in full agreements can usually qualify for a mortgage loan two years (or less) after the short sale.