A short sale is a sale of property where there is more owed to the lender than the property is worth, and the lender accepts the “short proceeds” as full payment of what is owed. The proceeds from the sale fall short of the balance owed to the lender or lenders.
A short sale is usually initiated through negotiations by a third party negotiator with the existing lender. If the lender agrees to discount the loan balance due to the market conditions (i.e., the house reduction in value) and the economic hardship on the part of the mortgagor, and accepts less than the full amount owed to satisfy the debt.
Why is a Short Sale a "win-win" for all parties?
Lenders: A foreclosure is expensive and takes time. Lenders take a loss rather than worrying about the property sitting empty and deteriorating over time. The Bank’s business is to lend money, not to own and sell property.
Sellers: Sellers benefit by avoiding a long, stressful foreclosure process. They can stay in the property until it sells and can walk away with more dignity than the embarrassment of a foreclosure.
Buyers: A buyer benefits by purchasing a house at a discounted price.
Why would my bank approve a short sale? To your lender, business is business… and this is about smart business. If a bank must complete the entire foreclosure process, it may lose more money than it can recover. So, the lender assesses the value and potential cost and/or loss in both a foreclosure vs. a short sale situation. In the current market, many lenders decide on a short sale.
In a foreclosure process, the lender must spend money maintaining the property while waiting for a buyer. Utilities, lawn care, repairs, insurance, taxes, and other holding costs add up, not to mention attorney’s fees and securing the property against damage.
If you add those costs, to the loss in interest and the decreasing values, the bank is looking at significant losses – and an unknown future of potentially more losses. The costs keep adding up if the bank is unable to find a buyer.
Do I qualify for a short sale? If you are considering a short sale, you will need to meet some basic requirements. Are you able to answer “yes” to the following requirements?
- The House’s Market Value has Dropped
There is no available equity in your home, and the current amount owed to the lender is greater than the fair market value for the home. A large number of homes fall into this category based on current market conditions, and the rapidly dropping values of homes across the country.
- The Mortgage is in, or approaching, Default Status
In the past, lenders would not consider a short sale if your payments were current. That is no longer true today, based on current economic conditions. Because many factors can contribute to a potential default, many lenders are willing to find solutions to future problems before they arise.
- The Owner has Fallen on Hard Times
The homeowner will be required to submit a letter of hardship to the bank, explaining why the homeowner has or will stop making monthly payments. Examples of hardship include Unemployment, Divorce, Bankruptcy, Medical Emergencies, and Death.
- The Owner has No Assets
Most lenders will want to see that the homeowner does not have any assets that could be used to pay the shorted difference of the mortgage. Your lender will likely request copies of your bank statements and tax returns.
Is a short sale the best option for me? If you have negative equity in your home, are behind on your payments, or may be unable to continue making payments, a short sale may work for you. If you are unable to sell your home for the amount you owe your mortgage lender on the balance of your loan, a short sale is one option to get your home sold.
A basic overview of of the benefits are:
- You pay little or nothing for your short sale transaction
- You retain some dignity in the situation because you sold your home
- You avoid the social stigma associated with foreclosure
- You avoid a foreclosure and/or bankruptcy on your credit report
- You may be eligible to buy another home much sooner than with a foreclosure
- AND YOU CAN MAKE A FRESH START
A short sale allows you to avoid foreclosure, and the hopelessness and anxiety involved. If you are interested in more information about a short sale, contact us for direction. Only you can decide what choice is the best for you regarding your home and financial future.