What is a Short Sale and How Does It Work?

If you’re in the market to either buy a house that’s a short sale, or sell your home as a short sale, it’s important you understand the difference between short sales and foreclosures. The most prominent difference is that in short sales, the bank does not take ownership of the property. Rather than foreclose on the home, the lender works with the seller to agree and accept a mortgage payoff amount for less than what is owed; therefore relieving the homeowner financially and making the sale of the home more attractive to home buyers. The lender then decides to either forgive the remaining balance of the loan, or will make payment arrangements with the borrower for the difference. By agreeing to a short sale, the lender quickly resolves the financial obligation of the loan with less of a loss than it would have incurred with a foreclosure.

Short Sales from a Lenders View

Lenders are fully aware that foreclosures are a huge issue right now. A large number of borrowers who are struggling will end up losing their homes. Foreclosure is an expensive and time-consuming process for a lender. After foreclosing, the lender owns the home and has to maintain it, insure it and pay taxes on it. So instead of receiving payments each month, the lender is now handing out money. In many cases, instead of the lender foreclosing on the house, the lender may agree to a short sale. Short sales help the lender look good on paper because the property never gets listed as an actual foreclosure, which helps the lender report less of a liability.

How to Sell a House as a Short Sale

Even though it’s financially to your advantage to sell your home as a short sale rather than foreclose, it has its drawbacks. If you're the seller, a short sale is likely to damage your credit; but not nearly as much as a foreclosure. In some short sale negotiations, lenders have been known to agree to minimize the damage to the seller’s credit rating. Although there is no obligation on the lenders part to agree to this, if you can convince the lender not to report this action as a black mark on your record, it will give you a head start in rebuilding your credit. This is also something the buyer of your home can negotiate for. Either way, if you get the lender to agree, get it in writing as part of the deal!

Another drawback of a short sale is you walk away from your home without any cash in your pocket from the deal; which can make it challenging to find other means of living.

There are also some qualifying factors to consider. Unless you are far behind in payments and you’ve received a default notice, lenders almost never agree to short sale requests or offers. Also, filing for bankruptcy eliminates your chance at selling your home as a short sale because negotiating a short sale is considered a collection activity and collection activities are not allowed in bankruptcies. In order for a mortgage lender to even consider allowing you to sell your home as a short sale, you must first submit a hardship letter. Remember, a lender will not even discuss a short sale unless you have fallen behind on payments; typically 90 days behind. In your hardship letter, you must convince the lender that taking a smaller loss now is better than what could result in a larger loss down the road.

Realtors and Short Sale’s

When shopping for a home, it’s important you work with an experienced Realtor, especially if you are purchasing a home that’s a short sale. Not all real estate agents know how to handle them, so make sure you consult with one who can demonstrate special training or a good track record. A knowledgeable realtor will know how exactly how the short sale process works and will work directly with the bank to be sure the deal goes smoothly and in a timely fashion.

An experienced realtor can also help you locate homes in your area that have not yet foreclosed. You can also reference online databases, court listings and legal ads. Once you find the home of your dreams, the first thing you need to do is determine how much is owed on the house in relation to its estimated value. The higher the amount owed, the better off you will be in getting the bank and the seller to agree to a short sale because it indicates the seller might have trouble selling it for enough to satisfy the loan. You’ll want to avoid homes where the owner has a lot of equity because the mortgage lender will likely prefer to foreclose and sell the property for an amount closer to the market price.

How to Buy a House that’s a Short Sale

As the buyer, you may have picked up the house at a reduced price, but in many cases the property will likely need some repair or upgrades. This can make it more challenging for the buyer, allowing for extra hurdles to make the deal happen. However, being that the lender is eager to get paid back the money it loaned out, they might offer other favorable financing terms.

Some Things to Consider for a Short Sale Purchase:

What condition is the property in? If the property needs work, most home buyers won’t consider it, which works to your advantage.
Do your homework! Determine what the property is worth and consider its profit potential.
Contact Shore Mortgage! You’ll need to know what you’re preapproved for so you can make an offer on a home. In a short sale, things can move quickly and you want to have already talked to a Shore Mortgage Loan Officer because chances are they will require closing in as few as 20 days.
Don’t be afraid to negotiate! Be prepared to post a nice amount of money as good faith that your offer is one of serious interest. Even though you’re offer may be a good one, it is not uncommon for the lender to reject your offer and come back with a counteroffer. Be prepared for this by knowing what your absolute highest offer is. A Shore Mortgage loan officer can help you determine your bottom line.
Reach an agreement! Once an agreement has been made between you, the lender and seller, get it in writing! Once you close, the property is yours!

Time is an important factor in short sales. It is not uncommon for short sales to fall apart because the lender moves too slowly and fails to form an agreement before the property goes to auction. The more prepared you are and the quicker you can make the process move with the lender, the more likely you will be to have a successful transaction.

If you are interested in buying a home that’s a short sale, a Shore Mortgage Home loan expert can help answer any questions you might have. Call (866)584-0954 or click today!