When a lender agrees to accept a lower mortgage payback amount than what is owing in order to ease the sale of a home by a financially troubled owner, this is known as a short sale. The outstanding loan debt is forgiven by the lender.
A short sale is not the same as purchasing a property at a foreclosure auction or one that is genuinely owned by the bank, sometimes known as an REO or real estate-owned property. When a home’s value has dropped and the mortgage holder owes more than the home is worth, a short sale is only possible with the agreement of the lender. The homeowner in this situation has negative equity and may need to sell the house.
Is there a difference between a short sale and a foreclosure?
A short sale differs from a foreclosure. In a foreclosure, the bank takes possession of the property and attempts to recoup its costs by selling it. A bank understands that it will not recoup its investment in a short sale, and it is thought to be a better choice than dealing with the red tape of foreclosure and then dealing with a separate transaction.
Who benefits from a short sale?
For the buyer, the seller, and the lender, short sales are a mixed bag. If you’re a seller, a short sale will hurt your credit, but not as much as a foreclosure would. You’ll also be evicted from your home without receiving any compensation, making it difficult for you to locate another somewhere to live.
A short sale, on the other hand, can help you avoid foreclosure and its severe consequences. If the homeowner can persuade the lender to record the debt to credit bureaus as “paid in full,” a short sale is less detrimental than a foreclosure. The buyer obtains the home at a lower price, but it almost certainly has issues — think fixer-upper — and the transaction must go through a lot of red tapes to be completed. A lender may even demand that a buyer pay closing costs that would typically be borne by the seller.
The lender suffers a financial loss, but it is unlikely to be as large as it would be if the property were foreclosed on. In a short sale, the sale proceeds are less than the amount required to pay off the seller’s mortgage obligation and closing expenses. Everyone who is owed money must agree to take less, or maybe no money at all, in order for this contract to close. As a result, short sales are complicated transactions that proceed slowly and frequently fail. In most cases, everyone gains something from a short sale, though everyone also loses something. In the end, a short sale is all about avoiding the worst-case scenario.
Should you sell your home through a short sale?
Whether or not you should proceed with a short sale is determined by your unique circumstances and what is most likely to benefit you in the long run. You may not have much of a choice if you can’t afford your mortgage and home values in your neighborhood have decreased. A short sale may be able to help you maintain some of your credit by avoiding a foreclosure on your record. Consider your alternatives carefully to determine what is most likely to work in your scenario, and then go with what you believe is the best option for you.
How long does a short sale take?
A short sale might take anywhere from a few weeks to several months. Short sales take longer to complete since they are more complicated deals. In addition, the original lender must analyze the short sale offer before deciding whether or not to accept it. If the lender believes that continuing through the foreclosure procedure will net them more money, the short sale request may be rejected.
Working with a real estate agent who has handled short sale deals before will help you save time. A short sale is one type of real estate transaction in which you will require the assistance of an expert agent or attorney. Because not all real estate brokers are trained to handle short sales, make sure you talk with one who can show you proof of particular training and a proven track record. Having a real estate agent on your side who understands short sales and has successfully negotiated with others can improve your chances of closing the deal.