As more homeowners find themselves underwater -- owing more on their mortgage than their home is currently worth -- and unable to make the monthly mortgage payments, many are turning to short sales, which allow a homeowner to sell their home for less than owed on the mortgage. Short sales can be a win-win situation for all parties, because they enable home buyers to purchase properties in desirable neighborhoods and at favorable prices.

Here's what you need to know...

· Theoretically, short sales should be a win-win for the bank and the homeowner. Although the bank does not receive the full amount owed on the mortgage, it also does not incur the costs of foreclosure (which can run them about $40,000) and/or eviction, if necessary. Many homeowners also prefer short sales because it is less damaging to their credit scores than a foreclosure. Take a look at How Short Sale and Foreclosures Affect Your Credit Score. However, many real estate experts say that the majority of banks are reluctant to approve short sales, and often let properties go into foreclosure, even when there are reasonable offers on the property. In addition to considering the price, most lenders also take into consideration whether the homeowner can demonstrate financial hardship. If the homeowner is capable of making payments, many lenders will try to work out a loan modification, rather than a short sale.

· Unlike foreclosed properties, which may be run-down and vacant for many months, short-sale properties are likely to be better maintained, as most owners may still live in the home. Buyers have to weigh their options. On one hand, short sale purchases might have a better maintained home and because the owner is still involved with the transaction, they have to disclose all pertinent information. BUT, a buyer might have to wait six months for the lender's acceptance (OR counter-offer, OR rejection). On the other hand, foreclosure purchases will have much faster response times. BUT, since the bank/lender has never lived on the property, they do not know what to disclose. If there is a leaky roof, they don't have to tell you that! If you are a buyer, make sure you discuss these options with an experienced REALTOR®.

· Short sales often are more time intensive than traditional transactions and often require additional paperwork. As we mentioned before, short sales take as long as six months to receive approval due to the large number of offers the banks/lenders receive. If information or required forms are missing or incomplete, the bank may set the offer aside, which could delay the process and cause the property to go into foreclosure. To expedite the process, sellers should work closely with their REALTOR® to provide all of the necessary paperwork.

· It is important to remember that in a short sale, although the seller may be anxious about selling the property and willing to accept any offer, it is ultimately up to the lender to determine if, and at what price, the property can be sold. Home buyers should work closely with their REALTOR® to submit realistic offers.