Whats a Short Sale in Real Estate?
Whats a Short Sale in Real Estate?
When a mortgage lender accepts a mortgage payback amount that is less than what is owing in order to enable the sale of the property by a financially troubled owner, this is known as a short sale. The outstanding loan sum is forgiven by the lender.
A short sale is distinct from buying a house at a foreclosure auction or one that is a real estate owned property (REO), which is a home that the bank truly owns.
When a house’s value has decreased and the mortgage holder owes more on the mortgage than the home is worth, a short sale can only take place with the lender’s approval.
In this case, the homeowner may need to sell the house because of negative equity.
Meaning of Short Sale
Short sales typically happen when a homeowner has fallen behind on one or more mortgage payments and is in dire financial straits.
There may be impending foreclosure procedures.
Additionally, they are more likely to happen during a downturn in the housing market, such as the financial crisis of 2007–2009, which saw a decline in property values and a slowdown in sales across many areas.
For instance, if property prices decline, a homeowner can wind up selling a home for $150,000 with a $175,000 mortgage balance still owing.
The shortfall is the $25,000 difference (minus any closing charges and other selling expenses).
Short sale vs. foreclosure
A short sale differs from a foreclosure in several ways. In a foreclosure, the lender seizes back possession of the home before trying to recoup some of its losses through a sale.
Short sales are preferred to dealing with the red tape of foreclosure and then moving on with managing a separate transaction since lenders recognize that they won’t get their investment back in short sales.
How a Foreclosure Works
After the borrower stops making payments, the lender takes possession of the property in a foreclosure. A foreclosure is started by the lender alone, as opposed to a short sale. The lender’s final resort is to foreclose.
In these situations, the lender repossesses the house in an effort to finally recoup its mortgage investment. Contrary to the majority of short sales, many foreclosures happen after the homeowner vacates the property.
The lender will evict the homeowners if they are still living there.
After gaining entry to the property, the lender requests an appraisal and lists the house for sale.
Because the lender wants to swiftly sell the asset, foreclosures typically go more quickly.
At a public trustee sale, foreclosed houses may even be auctioned off.
Homeowners who go through foreclosure must wait two to seven years to buy another house, depending on the situation.
For seven years, a foreclosure remains on a person’s credit report.
How a Short Sale Works
During the short sale procedure, a troubled homeowner often gets to remain in the house.
With some limitations, a homeowner who has undergone a short sale may be qualified to buy another house right away.
A short sale requires a lot of work, but a foreclosure simply allows you to walk away from your home—albeit with serious ramifications for your financial future, such as having to file for bankruptcy and ruining your credit.
But the extra labor required for a short sale can be worthwhile in the end.
The Six-Step Short Sale Procedure for Buyers
Look no further if you’re wondering what the normal processes are that take place throughout the short sale process.
Step 1: The homeowner first discusses the possibility of selling their property through a short sale with their lender and a real estate agent.
They can now provide their lender with a short sale deal.
Additionally, they will need to demonstrate to their lender that they are no longer able to make their mortgage payments and do not own any resources that would enable them to make up any missed payments.
Step 2: The homeowner lists the property with the assistance of a real estate agent.
Once a buyer expresses interest, they will complete a sales contract for the purchase of the property.
Even though both the seller and the buyer agree on the conditions, this agreement is still subject to the lender’s approval and is not final until then.
Step 3: After reviewing the contract, the lender may reply in a number of different ways.
They may decide to say nothing at all, reject the offer, reject the offer but specify specific conditions they would accept, or they may decide to accept the offer.
Step 4: The contract will either remain the same once the lender’s response is delivered to the prospective buyer or they will decide whether to accept or reject the lender’s conditions.
The onus is now on the customer, so to speak!
Step 5: The short sale property closes and is given to the new buyer if the contract is authorized.
Even when the whole mortgage sum was not paid off by the sales, the lender obtains all proceeds from the sale of the property and relieves the original homeowner from their mortgage obligation.