House Short sale, What is it About?
A short sale is a pre-foreclosure sale of a mortgaged property wherein you sell your house for less than your mortgage loan's remaining balance. A short sale is made when a property is on the verge of foreclosure to lessen the delinquency's impact on an individual's credit score.
When short selling your property, all the sale proceeds will automatically be received by the mortgage lender. The remaining balance will either be shouldered by the seller or forgiven by the lender.
After the short sale, a 'deficiency waiver' will show that you have already paid the remaining balance, thus relieving you of any financial responsibility to the mortgagor.
An alternative to foreclosure is the short sale, and it can be an option if you are:
- Disqualified to refinance or modify your mortgage
- Facing long term hardship due to varied reasons
- Months behind on the mortgage payments
- In debt more than the home's worth
- Cannot sell the house at a price that can cover your debt
- Can no longer manage the home physically and financially
Why Short Sale?
Homeowners short sell their house when the mortgage is left unpaid for months and on the brink of foreclosure. A short sale is better than foreclosing the property because it negatively impacts your credit score less than a foreclosure.
The bank owns foreclosed properties through liens, or the legal right to claim a property used as collateral for a loan. Once unpaid for a certain period, the bank seizes the property and puts it up for auction to liquidate its assets.
Factors to Consider When doing a Short Sale
When doing a short sale, always keep in mind that the lender is not obligated to approve your request. Without lender approval, a short sale is not possible. However, a Short Sale is the best option than foreclosure, especially if you have accumulated months of arrears.
There are many factors to doing a short sale. Let's look at them one by one.
- Consider your Financial Situation and Assess Your Needs
Your financial situation matters and makes a difference to your lender when you request a short sale. Suppose the reasons you provide for your inability to pay are valid. In that case, chances are your lender will sympathize with you if your delinquency is due to loss of income, unexpected medical bills, or death.
Suppose at first you did not disclose your financial troubles during the loan application. In that case, there is a probability that your lending institution will not agree to a short sale or even opt for foreclosure. One rule of thumb, while negotiations are underway, be a wise spender.
- Short Sale Approval Request from lender
Wait for your mortgage payments to be on default, or until the time that you can no longer pay. The lender will now consider a short sale, or they may simply consider foreclosure as a final resort to recover from their financial losses.
Talk to the right people. The banker has no authority to decide on matters of your concern. Speak with the people in your lenders' loss mitigation department and speak about your situation. Be patient and try again on the next day if the conversation did not get along well.
- Prepare Yourself for the Short Sale
Once the lender approves the House Short Sale, create a proposal and scout for potential buyers. Consult a real estate agent, legal expert, and tax professionals. Short sales have all the more complexities than average property sales. Mistakes could cost substantially more than usual.
- The Short Sale Price matters
The price setting is quite different from the regular home sale. Remember, price matters. In as much as you wanted to sell the property according to its market value, you are short selling in the first place. You can try to keep the selling price as close to the amount of your loan balance, but not too much because the risk of not getting any buyers is too high.
Short Sale Step by Step Guide
A house short sale requires a long and complicated process to complete. You need to understand all the details before deciding to short sell your house.
1. Create your proposal and find a buyer
You need to find a buyer for your short sale. To do that, you should prepare a short sale proposal with other standard paperwork. You also need documents to prove the financial strain that brought you to sell your property short.
This proof may consist of medical bills(if applicable), a notice of job termination, pay stubs, or any proof of your current situation. You also need to prepare a hardship letter that vividly describes how you are not capable of paying the mortgage. Once you obtain the necessary approval, it's time to find your buyer.
2. Submit your Short Sale Proposal
The proposal, check! Buyer, check! Once ready, submit your request to the lender. Be conscious of submitting your proposal because your lender will have the key to your financial information. They can use it to contest your proposal.
If you have documented your cash assets, your lender can force you to cover some mortgage and final sale expenses through a deficiency judgment. The presence of your attorney may come in handy in this situation. At this point, all you have to do is wait.
3. Know and understand your options
Circumstances in life can lead to financial crises. If you cannot juggle your expenses and pay the mortgage has become difficult, immediately talk to your lenders to discuss your options. You may negotiate for a loan modification or revised payment. Be sure that a short sale is a right decision for you before starting to work on it.
Short sale and foreclosure, are they the same?
Definitely not! Foreclosure is when a bank takes hold of a property still under a mortgage. The bank will conduct an auction of foreclosed properties in an attempt to recover its losses.
A short sale is better than property foreclosure in the sense that it lessens the negative impact on the seller's credit score and gives you a chance to apply for another mortgage after a certain period.
Who Benefits From A Short Sale?
There are many pros and cons of a short sale for all participating parties. They differ for each of the concerned parties.
You would think that the seller is the losing end of this deal because they don't get anything from the sale proceeds. However, not everything is about money.
Let's look at the advantages of getting a short sale compared to a foreclosure or a traditional house sale.
- Recovery from credit score: A short sale process gives you a chance to buy a new house for less than the amount of time involved after a foreclosure. You may find it harder to avail because you need to update your mortgage payments a year before applying. However, the FHA will still honor your application for a new mortgage. A foreclosure leaves a negative mark on the borrower's credit report for up to seven years.
- Peace of mind - The seller will be able to avoid the emotional strain of going through the process of foreclosure. And at the same time, the homeowner is allowed to stay in the house while being sold.
- Savings on fees - Closing fees, additional charges, and real estate agent commission are waived. In a short sale, fees and commissions will be shouldered by the lender.
Of course, a short sale will have its drawback. Among them are the following:
- Sellers need approval - A lender approval to proceed with the short sale causes a slow down of the process or even completely reverse it. The bank's acceptance of the short sale is hard to obtain, even if the owner has a valid reason for their incapacity to pay the mortgage. The final decision still lies on the lender to approve or choose to foreclose the property.
- The sale leaving you with nothing - Short sale is not similar to a regular sale where the seller walks away with sale proceeds. In a short sale, the amount of purchase goes to the lender to recover the accumulated arrears. The chances are that the outstanding mortgage will not be paid in full by the short sale. So the lender may still require the seller to pay the difference.
- Damage to Credit score - A short sale may affect your borrowing capacity to as much as 160 points credit score.
The buyers can significantly benefit from a short sale because they can acquire a property at a hugely discounted price, among others.
Buyers of short sale houses need to have the flexibility to wait or take immediate action during the short sale process. The advantages of a short sale include the following:
- Active sellers: The seller's goal is to avoid foreclosure while lenders want to recover from losses. It makes both of them work hand in hand to finish the deal. The buyer will be in the right spot to negotiate and bargain the price.
- Reduced competition: Short sale is complex, and the time frame is uncertain. The situation will discourage potential buyers. Meaning, the competition is less for buyers who want to play in the game.
Although buyers can acquire a property for less than the amount they are willing to pay for it, it still has its disadvantages.
- Longer-term - Process is complex and requires a more extended period for a short sale (120 days maximum) than a traditional home sale ( 45 days). When an offer is made, bank approval is required, which may take weeks or even months. Even if the deal is closed, the lender may opt to reject the offer. The lender may think that he can get more money in foreclosure. The lender is in charge, and the short sale may turn to a full year to process and finalize.
- Involvement of both parties (lender/seller) - to recover as much money as possible, the lender and the seller may get themselves involved in all deals relating to the property. The buyer may also be asked to shoulder the closing fees.
- The disrepair of home - A short sale house can be in a state of neglect or abandonment. The buyer needs an experienced real estate agent for a home inspection professional to alleviate any surprises. House maintenance is a must, as this can create a problem if the buyer is getting an FHA loan.
Finding Short Sale houses
If you are interested in buying a short sale house, find yourself a real buyer's agent. Real estate brokerage companies provide lists of short sale houses suited to your needs. Ask your agent for possible market listings where you can search for short sale homes.
You can also search directly through the listings of sales houses. They are listed but not flagged directly as a short sale. You can distinguish houses on short sale by scanning the descriptions. Short sale houses offer an 'outright sale' disclaimer or other description such as 'subject to bank approval,' 'notice of default,' 'headed to auction' or other give away status.
- Find a short sale from the courthouse - Find lists of people in loan default at the county clerk's office. Also known as pre-foreclosure, a house sale is one step before a foreclosure.
- Scan the newspaper for the local real estate section and find short sales - Search in 'real estate for sale' and look for the term 'short sale 'or 'foreclosure.'
- Refer to online platforms - These platforms can boost your search. Use a search that specifies short sale properties.
Frequently asked questions
Buyers tend to ask questions. Let's try to answer some of the most common questions posed by buyers of short sale properties.
Is it possible to shop for a lender even if the property is not approved for a short sale?
In appraising a buyer's offer, the seller's mortgage lender will evaluate his ability to purchase the property. It is a must for buyers to work with a reputable and flexible lender.
Why is it difficult to buy a property on a short sale when there are many lenders?
There is a short sale if all lien holders of the property agree to the short sale. They want to receive a certain amount for any amount left after all expenses are paid. Investors will have their demand and process of review before they approve a short sale.
Is it possible for a home seller to cancel the short sale contract?
Yes, the short sale contract may be canceled by the home seller because of several reasons:
- Change in the situation of the seller
- A short sale is prevented by foreclosure
- A higher offer is on standby
- The owner filed a bankruptcy claim.
A short sale is a result of several reasons. Reasons can be because of a divorce, medical expenses, separation from a job, and other economic reasons. A short sale is the easiest and possible way to get out of the problem of foreclosure legally. It is not easy for a house owner to lose a house, but with a short sale, the chances of getting another home of your own are higher than going through a foreclosure.