Understanding Short Sales
May 11, 2022
What is a short sale?
A short sale is a sale by a financially distressed homeowner for less than the amount owed on the mortgage. The buyer of the property is a third party (not the bank), and all the proceeds from the sale go to the lender. The lender either waives the difference or obtains a deficiency judgment against the borrower so that the borrower must pay all or part of the difference between the sale price and the original mortgage value to the lender. In some cases, this difference must be waived by law in a short sale.
Understanding Short Sales
The term "short sale" refers to the fact that the home is being sold for less than the balance of the mortgage - for example, a person sells a home for $180,000 with $200,000 remaining on the mortgage. In this example, the $20,000 difference, less closing costs and other selling costs, is considered a shortfall.
Before the process can begin, the lender holding the mortgage must agree to the decision to conduct a short sale, also known as a "pre-closing" sale. In addition, the lender, usually a bank, needs documentation showing why a short sale makes sense; after all, the lending institution could lose a lot of money in the process. No short sale can take place without the lender's approval.
Short sales are typically time-consuming and paper-intensive transactions that can sometimes take up to an entire year to process. However, short sales are not as detrimental to a homeowner's credit score as foreclosures.
Even though a short sale is less detrimental to a person's credit score than a foreclosure, it is still a negative credit factor. Any type of property sale that is deemed "not paid as agreed" by a credit company is a credit score negative. Therefore, short sales, foreclosures, and foreclosure contracts negatively impact a person's credit score.
In addition, a short sale does not always forgive the remaining mortgage debt after a property is sold. This is because all mortgages consist of two parts: a promise to repay the lender and a lien on the property used to secure the loan. The lien protects the lender in the event that the borrower is unable to repay the loan. It gives the lending institution the right to sell the property to repay the loan. This portion of the mortgage becomes void in the event of a short sale.
The second part of the mortgage is the promise to repay, and lenders can always enforce this part, either by issuing a new promissory bill or by collecting the shortfall. In either case, lending institutions must approve the short sale, and borrowers sometimes have free rein.
Important points to remember
A short sale in real estate is a sale of a home for less than the amount still owed on the mortgage.
It is up to the mortgage lender to approve a short sale.
Sometimes the lender will waive the difference between the sale price and the amount of the mortgage, but not always.
For the seller, the financial consequences of a short sale are less severe than those of an auction.
For the investors, it is important to calculate the cost and make sure there is a profit margin left when the home is resold.
At this point, you should consult with a short sale specialist . Do not make the mistake of trying to handle a complex short sale transaction yourself, because you could end up in even more financial trouble. You may be able to pay these service fees from the proceeds of the sale of your home. Our expert team is ready to support you in every step of this process, call us now (800) 527-8979