What is a short sale?
A short sale is a real estate transaction where a property sells for less than the amount owed on the property.
For example, if a home has a mortgage for $200,000, but it only sells for $150,000, this is a short sale. Short sales are options for homeowners who can no longer afford their home.
If a homeowner falls behind on his or her mortgage or experiences a life-changing event that makes it impossible to pay the loan in the future, a short sale is a possibility.
To sell a home as a short sale, every party with a financial interest in the home must approve the sale. Lack of approval from all parties is one reason that short sales fall through.
Some homeowners have liens, judgments or second mortgages on their home. For a short sell to close, homeowners should have a plan for ensuring that all creditors are satisfied. This involves convincing them that the short sale keeps more money in their pockets.
A short sale will not work unless all creditors agree to accept less money than they are owed.
Why do short sales take place?
Short sales usually take place instead of more drastic, expensive measures, such as bankruptcy or foreclosure. It makes sense for the bank that holds the mortgage for a home to sell the property for as much money as possible.
Short sales do not impact the homeowner's credit score as severely as bankruptcy or foreclosure. This puts the homeowner in a better position to purchase a more affordable property or secure loan approval in the future.
To be sure, foreclosing on a home is an expensive process, and banks are not in the business of holding and selling properties. Banks usually permit short sales because they believe the final outcome will be more profitable than foreclosing.
Who is eligible for a short sale?
Usually, to be eligible for a short sale or to even have a chance of securing approval for a short sale, the homeowner must be behind on the mortgage.
In some cases, the bank may approve a short sale before the loan goes into default, if the homeowner experiences a significant change in his or her financial situation.
How do you sell your home as a short sale?
If you are a homeowner in financial distress, you should first contact your mortgage company to secure approval to list your home as a short sale.
Be prepared for comprehensive paperwork that demonstrates why you can no longer afford to make payments on the home. You'll need to provide documentation, such as paycheck stubs and bank statements that prove you are experiencing financial hardship.
Once your mortgage company agrees to accept less for the home than you owe, you can list the home with a Realtor.
How do you purchase a short sale?
Ask your Realtor to show you properties listed as short sales. Once you make an offer, be prepared to wait. Since short sales usually have to secure approval from multiple parties, the process takes much longer than the procedure to purchase a conventional property. While traditional sales usually take 30 to 45 days, short sales may take 120 days or longer.
Why should prospective homebuyers consider short sales?
If you need to maximize what your budget can buy, it is a smart idea to look at short sales. Though short sales are time consuming to navigate, they enable potential buyers to save money on their real estate purchase.