What Is a Short Sale?
A short sale is when a homeowner owes more on the loan than the market value of their property, and they decide to avoid foreclosure. Homeowners often work with their lender and sell the house for less than is owed.
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, there is no advantage for the lender. Short sales prevent foreclosure or relocation for the homeowner.
Short Sale Process Timeline
A short sale can last six weeks to six months. This depends 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.
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 have a negative impact on credit scores.
Advantages of Short Sale
The primary advantage is allowing the homeowner to escape a financially tumultuous situation and the lender avoiding 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 their equity. It 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 were 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 suited for a short sale. However, lenders have eligibility qualifications. The property needs to be in risk of default (the homeowner has not made several payments). The property must also be “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. The homeowner voluntarily transfers ownership to the lender, which avoids 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
There are no tax consequences for a short sale unless the terms of the mortgage 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:
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.
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, concerns, or just need further assistance with your homeownership journey!