What is a Short Sale?
A short sale is the sale of a real estate property for which the lender is willing to accept less than the amount still owed on the mortgage. This often happens just prior to a foreclosure, when the lender might be willing to accept a "short" payoff (sale).
In order for a sale to be considered a short sale, the following two things must be true:
- The homeowner must be so far behind on mortgage payments that he or she is unable to catch up.
- The housing market has gone down so much that the house is worth less than the remaining balance on the mortgage.
Why sell for less than the Mortgage value (short)?
In most cases, the lender (and the homeowner) will try a short sale process in order to avoid foreclosure. With this type of sale, the impact on the homeowner’s credit report may not be as bad as it would be with a foreclosure in some circumstances.
The homeowner initiates the sale of their house. For a short sale to take place, the value of the home must be less than the amount the homeowner owes, AND the homeowner must be so behind on the mortgage payments that he/she is unable to catch up.
Potential buyers will deal with the home sellers during the process, but all of the details around the process must be reviewed and approved by the lender. The short sale cannot happen unless the lender approves it.
Because everything is dependent on the lender, the process can be unpredictable—even if the homeowner and the potential buyer agree on terms.
What are the benefits of a short sale?
- Home owner/seller avoids foreclosure and receives another opportunity for a graceful transition into more affordable housing.
- Mortgage lender mitigates its losses by avoiding the process of foreclosing and reselling the property.
- The buyer gets to purchase the property at fair market value. The buyer also may avoid some of the risks associated with buying a foreclosed property.
What are the disadvantages of a short sale?
- This process could take longer than a traditional resale because the lender has to approve the sale and the buyer must wait for the lender’s approval.
- The property will be bought on an “as is” basis.
- The approving lender will really agree to pay for any extras that a regular seller would normally agree to. This could mean higher closing costs for buyer. (For example, the buyer covers the cost for inspections and repairs).
What are the reasons the mortgage lender will not approve a short sale?
- When the homeowner still has money to pay for the mortgage.
- When the payout from the private mortgage insurance to the lender could reduce the loss enough to choose to foreclose the property.
- The property title is not clear, possibly due to subordinate liens.
- The homeowner has filed the bankruptcy.
- The mortgage lender initially approved the short sale but the homeowner refused to make a contribution to help reduce the lender’s losses.
Are you behind in mortgage Payments?
- A short sale can help you avoid foreclosure and give you the opportunity to transition into more affordable housing.
- If you are behind and you initiate the conversation it is always better than waiting too long.
- A short sale will delay foreclosure until all offers are considered.