Short sale may be a common term in the real estate world, however, some people may not be too acquainted with it. If you are wondering what short sale is, then you are not alone. Understanding short sales give a homeowner a better grasp on what options they have if faced with certain situations.
So what is a short sale?
Short sales happen when the bank or lender allows the homeowner to sell his/her property for less than the amount due on the mortgage. The proceeds from the sale go to the lender. For example, Mr. & Mrs. Smith borrowed $300,000 to purchase a house a few years back. Due to unfortunate financial circumstances, the couple is no longer able to pay their mortgage loan. They did a comparative market analysis to know their property’s worth. The result showed that the value of their home depreciated and is now just $250,000. This amount won’t cover what they owe on mortgage but since it’s a burden that they need to unload, they opt to sell their home and seek permission from their lender to sell it for $250,000. In most cases, the lender approves this request and consider the mortgage paid in full.
Short sale vs. Foreclosure
It’s a common misconception that all short sales involve homes that are underwater. Although many short sales involve a home in a foreclosure, not every short sale is a pending foreclosure. Another misconception is the belief that short sales do not have an on impact one’s credit score as compared to foreclosure. The truth is, both can affect the credit score but short sale may have less negative impact as opposed to foreclosure. What’s the difference between the two?
Short sales are usually initiated by the homeowners. As the owner of the property, your goal is to convince your lender to accept an amount less than your mortgage loan. Once approved, you find an interested buyer and negotiate with them. It is important to note that in this situation, you are still the owner of the property, however, a short sale requires your lender’s approval.
Foreclosure, on the other hand, is initiated by the lender. They take possession of your property and negotiate with interested buyers to liquidate quickly and recover their initial investment on it. Foreclosed properties may be auctioned off for public bidding.
What are the benefits of a short sale?
Most homeowners would prefer a short sale over foreclosure for the following reasons:
- Short sales do less damage to the credit score. As previously mentioned, both short sales and foreclosure can affect a homeowner’s credit score. However, short sales are not as detrimental as it shows you took action to avoid repossession of your property. In rare cases, the lender may agree to report short sales as “paid” instead of “settled”.
- The homeowner has more control in the process. Short sales also allow the owner stay in his/her home until the sale is completed.
- No need to wait for 5 to 7 years before a homeowner can apply for a mortgage and buy another home
- Short sales provide a dignified closure process for sellers/homeowners.
How does it work?
Sellers are allowed to do short sales if there’s not enough equity to pay off the mortgage or if there’s a financial hardship (unemployment, medical emergency, divorce, bankruptcy, death, etc). This is a better option than foreclosure as it gives homeowners some dignity to sell their home instead of having it repossessed by their lender. The short sale process varies depending on state laws but generally, it includes the following steps:
Short Sale Package – the seller needs to prepare and submit a financial package to the bank/lender. This includes the seller’s hardship letter, complete financial statements and financial records (tax returns, W-2s, payroll stubs, bank statements) and comparative market analysis.
Sending the Short Sale Offer to the Bank – once the offer is accepted by the lender, the listing agent will then need to send the following: listing agreement, executed purchase offer, buyer’s pre-approval letter, copy of earnest money check, proof of funds and seller’s short sale package
Bank Processing – the next step is for the bank to review the offer. Once the offer is accepted, bank processing will commence and a short sale letter of approval will be issued. This process can take a few weeks to months so a lot of patience is needed.
Just like in a traditional home selling, short sale process can be tedious and time-consuming, maybe even more as it needs a lender’s approval for the property to be sold. Understandably, a short sale is not everyone’s cup of tea. Fortunately, helping homeowners avoid foreclosure is one of Big House Investors’ expertise.