Understanding Short Sales: How They Work and Why You Could Benefit
If you’ve ever run into problems paying your mortgage, the term ‘short sale’ may have come up as you’re working with your lender or other agencies that help out when financial disaster strikes. That begs the question: what is a short sale?
What Is a Short Sale on a House?
A short sale is an option for setting debt with a mortgage lender when the homeowner has defaulted on the loan and foreclosure looks imminent. Essentially, it means that the bank is willing to accept less than they are currently owed for the house in order to avoid foreclosing on it.
It’s ideal when a property loses value and the homeowner can no longer make the payment. When a homeowner owes more than their home is worth, the terms ‘upside down’ or ‘under water’ are often thrown around. Since offers are likely to reflect the property value rather than the amount of money the current homeowner owes on it, the lender would, in many cases like that, have to sign off on accepting a lesser amount.
The Short Sale Process
First, the seller would need to apply for short sale status with their mortgage company. That would require writing a letter of hardship that explains why they won’t be able to repay the full amount of their loan; they’d ask the lender to write off the difference between the offered amount and the amount they owe. They’d also be required to provide financial documents that prove they’re unable to pay.
Once an offer is accepted by the seller, the real estate professional, whether it be an agent, broker, or a lawyer, would send the listing agreement, offer, and buyer’s financing information off to the lender for review.
They’ll either accept or reject the offer. The bank may also ask that the buyer pay for repairs and closing costs that would normally be paid by the buyer. This process can take a while.
How Long Does a Short Sale Take?
The word ‘short’ in the term short sale can be misleading. Many people associate it with the length of time it will take to close the deal, but that’s not accurate. In fact, it could take months, and it can take much longer than a ‘regular’ sale since there are some extra steps involved. Approval from the lender generally takes at least a month, and then it’s usually another month for closing. That quick timeline isn’t the norm, though. An average short sale takes four months or longer.
Benefits of a Short Sale
A short sale can absolutely benefit everyone involved; buyer, seller, and lender all serve to gain in that they don’t stand to lose as much if they are able to work out a short sale. Buyers may get a good price and better-than-average financing offers from the seller’s bank. Sellers get out from under the crushing debt of their current mortgage. The bank avoids foreclosure and the trouble and costs that come with it.
Short Sale VS Foreclosure
For both lenders and homeowners who are struggling, a short sale has potential upsides. While it’s not the most ideal scenario, it makes the best of a bad situation. A short sale is better than foreclosure for both parties.
When a bank forecloses on a home, it costs them big time. Between court fees, repairs, and state-sanctioned remediation efforts, the average cost for a bank to foreclose on a home in California is said to be about $50,000.
A short sale is better for homeowners because it has the potential to be easier on their credit rating. Foreclosure hits credit scores hard. The negative report stays on your credit history for seven years either way, and you can expect your score to drop significantly. However, a foreclosure always appears as a foreclosure while there’s some leeway in how a short sale is reported by your lender and so the short sale’s effect on credit may be less detrimental. Sometimes, the only ill effects to show on the report are the missed mortgage payments.
While the idea of a short sale can be scary, it’s a viable, less damaging alternative to waiting for foreclosure. If you’re considering a short sale, don’t hesitate to reach out to us. We’re very familiar with the process (and the waiting!), and we know how to work with mortgage companies on short sales. Getting you out from under your stressful mortgage is our priority, so contact us to see if we can help.