Explaining Short Sales

A short sale occurs when a homeowner sells their property for less than the outstanding balance on their mortgage. This typically happens when the homeowner is facing financial hardship and can no longer afford their mortgage payments. Here’s a breakdown:

Why a Short Sale Happens:

• Financial Hardship: The homeowner experiences a significant financial setback, such as job loss, medical expenses, or divorce, making it difficult or impossible to keep up with mortgage payments.
• Negative Equity (Underwater Mortgage): The home’s current market value is less than the amount owed on the mortgage. This often happens when home prices decline.
• Avoiding Foreclosure: A short sale is often seen as a less damaging alternative to foreclosure, both for the homeowner’s credit score and the lender.

The Short Sale Process:

1. Homeowner Contacts Lender: The homeowner contacts their lender and explains their financial situation, requesting a short sale.
2. Lender Evaluation: The lender evaluates the homeowner’s financial situation and the property’s value. They’ll typically require documentation such as financial statements, hardship letters, and a comparative market analysis (CMA).
3. Listing the Property: The homeowner lists the property for sale with a real estate agent. The listing price is usually based on the current market value, which is less than the amount owed on the mortgage.
4. Offer and Lender Approval: When an offer is received, it’s submitted to the lender for approval. The lender must agree to accept less than the full amount owed on the mortgage. This is the most crucial part, and it can take time.
5. Closing: If the lender approves the short sale, the transaction closes like a traditional sale.

Key Considerations for Sellers (Homeowners):

• Credit Score Impact: A short sale will still negatively impact your credit score, but usually less severely than a foreclosure.
• Deficiency Judgment: In some states, lenders may pursue a deficiency judgment against the homeowner for the remaining balance owed after the short sale. It is important to consult with a real estate attorney to understand the laws in your state.
• Tax Implications: The forgiven debt in a short sale may be considered taxable income. Consult with a tax advisor.

Key Considerations for Buyers:

• Time-Consuming Process: Short sales can take a long time to close due to the lender’s approval process.
• “As-Is” Condition: Short sale properties are usually sold “as-is,” meaning the seller is not obligated to make any repairs.
• Multiple Offers: Short sale properties can attract multiple offers, especially if they are priced attractively.

Benefits of a Short Sale (Compared to Foreclosure):

• Less Damage to Credit: A short sale typically has a less severe impact on credit scores than a foreclosure.
• More Control: The homeowner has more control over the process compared to a foreclosure.
• Avoidance of Public Record of Foreclosure: A short sale is not a public record in the same way a foreclosure is.

In Summary:

A short sale is a complex process that requires the cooperation of the lender. It can be a viable option for homeowners facing financial hardship and seeking to avoid foreclosure. Buyers can sometimes find good deals on short sale properties, but they should be prepared for a potentially lengthy and complicated transaction. It’s always advisable to consult with real estate, legal, and financial professionals when considering a short sale, whether you are a buyer or a seller.