A short sale is when the lender agrees to take a loss on a mortgage loan if the home is sold for less than the actual amount owed. This is otherwise known as a pre-foreclosure sale. It is an alternative for home owners who get behind on their monthly payments as a result of a financial hardship. Rather than allowing the bank to foreclose on the property, dragging the process out for a year or more and taking a big hit to their credit, they agree to sell the home for fair market value and walk away.
How to Quality for a Short Sale
Qualifying for a short sale requires proof of a financial hardship. If the homeowner has recently lost his or her job, been through a divorce or is experiencing health problems, for example, they may qualify for a short sale. Other qualifying factors exist as well. The homeowner must be behind on mortgage payments and be unable to refinance the loan or modify it. They must also owe more than the house is worth, be unable to sell it for what they actually owe on it and prove that they can no longer afford to live in the home.
Once qualified, the home sells in a normal fashion with the assistance of a real estate agent. The price is set at the current market value, not at what is owing by the homeowner. The agent acts as the go between for all parties, but it is important to make sure that all of the paperwork involved is completely filled out and turned in on time.
Benefit of a Short Sale
The main reason people chose a short sale is to get rid of the debt and stop creditors from hassling them. When a homeowner owes more than the house is worth, it becomes a huge burden. Getting behind on payments is inevitable and that leads to the house going into foreclosure. The short sale provides some relief to such borrowers, so they can move on quicker and be able to leave the house free and clear. It is especially good for people who either don’t want to or are no longer able to stay in the home.
Purchasing a Short Sale
Buyers can generally get a good deal on a short sale. Since the bank is the one who takes a loss on the sale, they also need to approve the sale, unlike with traditional deals in which it is only the homeowner who needs to approve the offer. Keep in mind, however, that the seller and lender will likely be unwilling to assist with repairs and the house will be sold “as is.” Nor will they help with closing costs, as can often be arranged with a traditional sale. The other drawback is that it may take months for the bank to even consider your offer and there is no guarantee that they will accept it. Be prepared for negotiations.
Advantages and Disadvantages of a Short Sale
One reason borrowers like the idea of a short sale is that it can give them up to a year to stay in the house and save money to find a new place to live. They can also qualify for $3,000 in relocation funds. A short sale does hurt your credit score though and you could end up paying taxes on the difference between what you owed on the home and what the home actually sold for. There is always the chance that the home still won’t sell. In that case, a deed in lieu of foreclosure may be a better alternative to a short sale.