If none of the above are a realistic option and you can't make your payments then you must balance and consider foreclosure, bankruptcy, and the short sale. Most short sales occur when the homeowner has either no equity or negative equity in a property, the homeowner is facing or actually in foreclosure, and the homeowner has suffered a calamity such as a job loss, disability, or divorce and is looking at bankruptcy.

A typical scenario for a short sale looks like this:

Homeowner purchases a home for $450,000 in 2003 with 10% down and a mortgage balance of $405,000. By 2004, the home's value has increased to $575,000 and interest rates have declined so the homeowner refinances to pull cash out. New mortgage $550,000. In 2005, homeowner starts to run into financial trouble and continues to make payments from savings, hoping things improve. By 2006, savings are gone and homeowner decides to sell the home for $550,000. The home doesn't sell because values have dropped back to $500,000 and the homeowner begins to miss payments. The foreclosure process begins and the homeowner can't lower the price because that would require the homeowner to come up with cash at the closing to cover the mortgage shortfall.

The recent downturn in housing prices combined with prior 100% financing schemes has caused the number of foreclosures to soar, and as a consequence lenders are becoming more open to the prospect of short sales.