A short sale is when financially distressed homeowners sell their property for less than the amount they owe on their mortgage. The property’s buyer is a third party, and the profits from the sale are given to the lender. The lender may forgive the difference or get a deficiency judgment against the homeowner and requires them to pay part or all of the difference between the original cost of the mortgage and the property’s sale price. A short sale tends to be a paperwork-intensive and extensive transaction. Sometimes, the process takes up to 1 year. A short sale, however, is not as harmful to a property owner’s credit rating as foreclosures.
Short Sale Explained – What is a Short Sale in Real Estate?
A short sale in real estate refers to the fact that the property is being sold for less than the amount remaining on the mortgage. Here’s a short sale example. A homeowner may sell his property for $160,000 when there is still $195,000 remaining on his mortgage. The difference of $55,000 minus other costs of selling such as closing costs is the deficiency.
Before the process can start, the lender holding the mortgage should sign off on the decision to make a short sale. The lender also requires documentation that states why a short sale is the best way. This is because the lender could lose a large amount of money. Without the lender’s approval, no short sale will occur.
Short sale rule transactions differ from state to state, but usually include a short sale package, purchase offer, and bank processing. Homeowners must submit a financial package to their lender to prove financial hardship. This package includes a letter describing their difficulty and financial statements and records such as bank statements, W-2s, tax returns, and payroll stubs.
Once the homeowner accepts an offer from a possible buyer, the listing agent sends the listing agreement, earnest money check copy, buyer’s pre-approval letter, executed purchase offer and the homeowner’s short sale package to the lender. If the package is not complete, the process will be delayed.
The lender will either deny or approve the offer. This process can take weeks to months. However, just because the homeowner accepts a purchase offer doesn’t mean the lender will agree to it as well. If the lender thinks they can earn more through foreclosure proceedings, they might reject the offer.
How Does a Short Sale Work?
Homeowners put their property on the market and formally designate it as a possible subject lender or short sale deal to potential buyers. Once a buyer shows interest to make a short sale offer, the property owner contacts the lender (usually a bank) and completes an application requesting for the home’s short sale status. While there’s no guarantee that the lender will approve the application, a short sale does remove many inconveniences associated with the mortgage like closing the books on the homeowner’s loan.
Property owners involved in the short sale process may need to submit several documents and files to their lender, including a hardship letter stating why they cannot completely repay the mortgage loan. They may also need to file records such as tax returns and pay stubs. The bank will assess your application and send out an appraiser to estimate the property’s full value against the short sale offer. They will either reject or approve the short sale request.
Is Buying a Short Sale a Good Idea?
A short sale offers many advantages, so financially distressed homeowners may want to consider this option. Buying a short sale can help you get your dream house at a low price. Motivated sellers want to cut a deal, so low-ball offers have better chances of being accepted in a short sale than in traditional home sale negotiations.
There is also less competition. A lot of homeowners, particularly first-time buyers who are not used to the complex process involved in buying a property, may not consider a short sale. Those who have more patience for a short sale will face less competition for short sale homes.
Are Short Sales Bad?
A short sale contract can have negative consequences for buyers, like lender influence. Lenders may get directly involved in the negotiations and ask for a higher sales price than the property owner. They might do this to recoup more money on the mortgage loan.
The paperwork process involved in a short sale is longer than in a traditional home sale. The longer timetable might be a deal breaker for some buyers.
The property might be in disrepair as well. It is highly advisable to work with a real estate agent who is experienced in the short sale process. You should also consider hiring a home inspection professional to inspect the property. Short sellers may not have the resources to keep up with home repairs and maintenance.
What Does a Short Sale Mean for the Buyer?
A short sale can offer you a nice property for a nice price. By working with a real estate agent who specializes in short sales and with diligence, you can find a short sale that meets your budget and requirements. However, you also need to be ready for a long wait between making a purchase offer and finalizing the deal. Some deals don’t make it to closing. If you can deal with the emotional roller coaster and you are willing to invest time, a short time can help you find a great property for you and your family as well as offer a good return on your investment.
Can You Get a Mortgage to Buy a Short Sale?
Yes. The lien holder of the proper may require that you get pre-qualified or pre-approved for a short sale mortgage with them before approving your purchase offer. This is because they want to make sure that you can complete the purchase. You’re not obliged to use the same lender that’s releasing the property, so you should look for the best mortgage rates. A rate lock on current mortgage rates would not help because the process takes a long time. You have to be patient when dealing with a short sale and adjust expected timelines accordingly.