Short sales are commonly initiated by distressed homeowners who are underwater on their mortgages (the loan balance exceeds the home’s fair market value) and can’t afford or otherwise keep the home but want to avoid foreclosure. But they can also occur if the accepted sale price on a home is higher than the mortgage but not high enough to pay all closing costs and commissions. In a successful short sale, the lender typically agrees to release the lien on the property in exchange for receiving the loan payoff. It may either forgive the “deficiency” or difference between the original loan balance and payoff or make a plan with the seller to settle the remaining debt. In either case, since the lender will be receiving a short payoff in such a transaction, it must agree to grant a short sale, and will generally only do so if it will benefit the lender’s bottom line. If the lender doesn’t view the homeowner or property as a good fit for a short sale, it may disapprove of the sale.
How a Short Sale Works
A legitimate short sale must be an arm’s length transaction involving an unrelated buyer and seller and a bona fide lender. The following is an example of how the typical short sale unfolds:
Requirements for a Short Sale
There are four essential ingredients for a short sale, which are generally handled by real estate agents who specialize in short sales:
An underwater home: This means that a home has a fair market value that’s less than the remaining balance on the homeowner’s mortgage. A seller with a hardship: Most lenders view job losses, surprise medical costs, the homeowner’s death, natural disasters, and military service as acceptable hardships for a short sale, to name a few examples. Whatever the hardship, it should serve as a clear impetus for the homeowner to sell “short.” A willing lender: There’s no point in proceeding if the lender refuses the possibility of a short sale in no uncertain terms, which happens rarely. The lender should at least be willing to entertain a short sale proposal, but the more proactive and committed they are to the seller’s agent’s initial approach, the smoother the transaction is likely to be. A qualified buyer: Buyers should ideally be prequalified or preapproved, free of excessive contingencies, and flexible with regards to closing.
Short Sale vs. Foreclosure
Both short sales and foreclosures provide homeowners with a means to dispose of a property they can’t keep. However, a short sale is a pre-foreclosure transaction that takes place when you sell a home for less than you owe. A foreclosure occurs when a lender repossesses your home after you fail to make the required payments. A short sale is generally a voluntary, cooperative undertaking with a lender that allows you to settle debts or have them forgiven in order to avoid the more aggressive, and, in some cases, unwanted, act of repossession by the lender in foreclosure. Borrowers prefer them because they may not damage their credit score as much a foreclosure; moreover, they can get back on their feet faster because they can buy a new home in as little as two years after a short sale compared to seven years after a foreclosure. Short sales also take less time, up to 10 months compared to the foreclosure timeline of as long as one year. Lenders also favor short sales given their lower costs. Discuss your situation with your lender to determine whether you’re eligible for a loan modification wherein the lender changes the terms of the existing loan to eliminate the need for a short sale (for example, by reducing the principal), or a mortgage refinancing (replacing it with a new one).
