A-to-Z Short Sale Guide for Homeowners in 2019
Short sale is one of the solutions to avoid foreclosure. For a homeowner it’s usually a last resort, and for a buyer it’s an opportunity to purchase a home with a discount. This article gives general information on what a short sale is, how it works and its pros and cons for homeowners.
If you are looking to buy a short sale residential property, we offer you our other guide: Buying a Short Sale Home.
Everything You Should Know About Short Sales
- Your current mortgage balance exceeds the “as-is” value of your home.
- Monthly mortgage payments are becoming increasingly more difficult, or outright impossible to pay.
- You can no longer keep up with the monthly expenses or required maintenance the home needs.
- You’re physically and emotionally drained.
At this point, your ideal situation would be to just get rid of the home, along with any expenses/headaches that are associated with it.
The question then becomes: is this even possible? The answer is: YES. If your situation qualifies, a short sale can be your knight in shining armor.
What Is a Short Sale?
In real estate the term “short sale” (sometimes also referred to as “quick sale”) is defined as a sale of a property in which the lender (a mortgage company or a bank) agrees to allow the seller to sell the home for less than what is owed on the current mortgage balance. The lender agrees to take a loss on the property. This transaction does not get recorded as a foreclosure against the owner’s credit. Short sale is one of the common ways to stop foreclosure at the last minute.
How Does a Short Sale Work?
As stated above, the basic meaning of a short sale is when the owner’s lender agrees to take a loss on the property, by accepting less than what is owed on the current mortgage balance.
For a better understanding, let’s take a look at this example:
Due to a recent hardship, John can no longer make his monthly mortgage payments to the bank. On top of this, John’s home is currently worth less than his mortgage balance.
After consulting with a
John’s current mortgage balance owed is $100,000. The “as-is”value of his home is $70,000.
After receiving an offer of $70,000 and submitting it to the bank, they agreed to let him sell the home for the $70,000 that it’s worth.
As a result, John was able to avoid the looming foreclosure, as well as restore his piece-of-mind.
Step-By-Step Short Sale Process for the Seller
In this article we will give you an outline of the short sale process for sellers. For more information read our guide Step-by-Step Short Sale Process for Home Sellers where every step is discussed in detail.
1. Contact a
2. The processing company will reach out to your lender and initiate the short sale process. This includes ensuring you are eligible for a short sale, and submitting the required hardship/financial documents to lender.
3. The processing company will assign an expert, local real estate agent to list your home for sale.
4. An offer is received and submitted to your lender for review.
5. The lender conducts an appraisal of the property to determine its current “as-is” value.
6. Based off of the appraisal, the lender accepts or counters the offer.
7. Once a price is agreed upon between the buyer and lender, the lender officially accepts the offer and sets a closing date.
8. Settlement Day! You can breathe a sigh of relief and write an awesome testimonial for your
Pros and Cons of a Short Sale
How Will a Short Sale Affect My Credit?
Before deciding to do a short sale, it is highly advised that the seller contacts a licensed credit professional to discuss the potential implications.
To put it briefly, a short sale will have a negative impact on your credit. However, it is much less of a negative impact than a foreclosure would have.
Are There Tax Implications with a Short Sale?
Before deciding to do a short sale, it is highly advised that the seller contacts a licensed tax professional in their applicable state to discuss potential implications.
The tax ramifications differ widely and are dependent on whether the home is used as a primary residence or an investment property, along with other factors.
Will I Be Able to Get Another Mortgage After the Short Sale Is Completed?
Your credit and financial history will be impacted by a short sale. However, it will be to a lesser extent, compared to a case with a foreclosure. As a result, you will be eligible to purchase another home in a much shorter time frame, compared with if the property was foreclosed upon. For in-depth knowledge on this subject matter, contact a licensed mortgage professional within your state.
Can a Bank Foreclose During the Short Sale?
This answer varies and is solely dependent on your given servicer, real estate investor on the loan, and how far into the short sale process you are.
In other words, this will be a case by case basis.
If your house is listed for sale as a short sale and there is an upcoming foreclosure auction scheduled, the lender may not postpone the auction date, if no offer is received prior to the date. In this case, the bank would still foreclose, even as the home is listed for sale.
However, if an offer is received prior to the foreclosure auction date, your lender may postpone the auction, in order to review the offer that has been submitted. In this instance, the bank would not be foreclosing on their scheduled date.
It is important to note that when a lender “postpones” or “puts the foreclosure on hold” to review an offer for short sale, this does not mean you are off the hook! It simply delays the foreclosure process.
The only way to avoid and stop the foreclosure is by completing the short sale.
Short Sale vs Foreclosure
So, which is the best option for you? Here are a few differences between the two:
Short sale has a negative impact on credit, but is not recorded as a foreclosure by the lender. Short sale prevents a much larger negative impact a foreclosure would have on the homeowner’s credit.
According to FICO, a foreclosure can drop your credit score from an average 85-160 points and stay on your credit an average of 7 years.
In some circumstances, if the home is listed as your primary residence, you may be eligible for relocation assistance. In these cases, the bank will write you a check to help with moving expenses. The amount varies, but averages between $1,000-$3,000.
The lender simply takes the home back, without offering any financial assistance to the homeowner.
Save Yourself Money
When homeowners work with a professional
According to the U.S. Congress Joint Economic Committee, the average legal cost to a homeowner going through foreclosure is around $7,500.
Short Sale vs Deed in Lieu of Foreclosure
Availability as an Option
As long as the homeowner’s situation meets the criteria, they should be eligible for a short sale.
Deed in Lieu
This option will be offered on a case by case basis, depending on the lender’s comfort level in the given situation.
As noted earlier, short sales have a negative impact on credit, but typically lessening than foreclosures.
Deed in Lieu
Negative impacts on credit are widely known to be similar to that of foreclosures.
To Stop Your Foreclosure