What Is a Short Sale?

What Is a Short Sale?

A short sale occurs when a homeowner owes more on the loan than the market value of their property and decides to avoid foreclosure. Homeowners often work with their lender and sell the house for less than the owed amount.

Short Sale Definition

The definition of a short sale is when a creditor agrees to accept a payoff for less than what is owed when the homeowner is in financial hardship. In a short sale, the creditor accepts the lower price in lieu of the debt so the homeowner avoids bankruptcy. The lender must approve short sales, which are often complex.

Reasons for Short Sale

Most of the motives involve financial hardship because otherwise, the lender would have no advantage. Short sales prevent foreclosure or relocation for the homeowner.

Short Sale Process Timeline

A short sale can last six weeks to six months, depending on both the lender and the homeowner. The process starts with pre-approval, where the homeowner submits a request to the lender. Then, the house is listed and sold on the market, similar to a regular home sale. Waiting for the home to sell and the lender to process the request is the most time-consuming part.

Pros and Cons of Short Sales

Short sales are a second-to-last resort and should be considered when preventing foreclosure. While they allow homeowners to escape foreclosure, they also negatively impact credit scores. 

Advantages of Short Sale 

The primary advantage is allowing the homeowner to escape a financially tumultuous situation and the lender to avoid the lengthy, expensive process of foreclosure. Short sales are never ideal. However, they are beneficial to all parties. 

Disadvantages of Short Sale 

The homeowner gives up equity, which often means they get less money. For the lender, a short sale means not receiving the total agreed-upon mortgage. 

‍Short sales also impact the borrower’s credit score since they are unable to fulfill their financial obligations. A short sale can lower credit scores by 100 points or more depending on the loss, how many payments were missed, and the lender’s policies.

Qualifying for a Short Sale 

Short sales are taken on a case-by-case basis. While there are no qualifications, some basic standards apply in most circumstances. Often, a short sale has to be the homeowners’ primary residence. Lenders also require the homeowner to prove they have no other option to avoid foreclosure.

Properties Eligible for Short Sale

All properties may be suitable for a short sale. However, lenders have eligibility qualifications. The property needs to be at risk of default (the homeowner has not made several payments) and “underwater,” so the owed mortgage is greater than the market value.

Alternatives to a Short Sale

Homeowners may take four possible alternate routes before a short sale becomes necessary. 

• First: renting out the property. It may be possible to generate enough income to cover the mortgage. 
• Second: refinance. With enough equity, it may be possible to refinance the mortgage and lower the payments. 
• Third: loan modification. If refinancing is not an option, the homeowner may be able to negotiate with the lender to reduce monthly payments. 
• Fourth: a deed in lieu of foreclosure. In this case, the homeowner voluntarily transfers ownership to the lender, avoiding the legal consequences.

Short Sale vs. Foreclosure 

A short sale is an agreed-upon process where the home is sold for less than is owed on the mortgage. Foreclosure transpires when a borrower defaults and the bank or lender repossesses the property. A short sale is a way to prevent the worst-case scenario, which is foreclosure.

Tax Implications of Short Sale 

A short sale has no tax consequences unless the mortgage terms state that you are responsible for the amount owed. 

Common Mistakes in Short Sales

The biggest pitfall is unclear communication. Provide all necessary information, be clear about the goal and reason, and respond to questions promptly. 

‍It is also essential to consult a financial expert in case of a short sale to acknowledge the possible options. Another common mistake is incorrect pricing, which is why homeowners should seek professional appraisals before starting the process.

Tips for a Successful Short Sale 

Following are three tips to ensure success:‍

Be Patient

Short sales often take months to finalize, so do not stress when the process takes too long.‍

Look for Cash Offers

Cash buyers make the transaction smoother, so it is worth considering.

Hire a Short Sales Agent

The process can get complicated, and hiring a professional will ensure the homeowner gets the best deal possible.

Summary

Short sales should be a last resort but can help both borrowers and lenders avoid foreclosure. Try all alternatives first, but if a short sale is necessary, communication with the creditor is key. 

Contact Wesley Mortgage today if you have questions or concerns or just need further assistance with your homeownership journey!