What is a Short Sale?
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Due to the impact of COVID-19 many home owners are facing financial hardship and they may need help from their lender to allow a short sale. Before we explain the Short Sale process in detail here is a summary of the major issues involved with a Short Sale …
- Because of the loss of income many home owner’s find that they owe more to their lender than their house is worth … they are “upside down”. If a home owner finds himself in this situation and if he needs (or wants) to sell his house … the home owner would have to bring cash to the settlement table to make up the difference between what the Buyer is paying and what is owed to the Seller’s lender.
- What many people do not know is that when a Seller is “upside down” they can ask for permission from their lender to sell the property for less than they owe on the property … and for the lender to forgive the home owner from having to pay off their total loan. If the lender approves this request then the process is called a “short sale.
- Before a Seller can sell their house using the Short Sales process they must be in foreclosure …OR … if they can demonstrate they are experiencing financial hardship ... they do not have to be in foreclosure. Many lenders will allow a Short Sale if the Seller is just behind in their mortgage payments, if they can demonstrate they are about to go into foreclosure..
- Ironically … a Seller cannot initiate a Short Sale. The banks will only deal with Buyers and their real estate agents. The Seller and their listing agent can attempt to attract potential buyers by “advertising” that the Seller is going to attempt a short sale but until a Buyer makes an offer on the property the short sale process cannot really begin.
- From the perspective of a Seller the primary advantage of a short sale is that they avoid being “foreclosed on” and their credit rating is impacted significantly less than with a foreclosure … and … they can sell their property and “down size” to reduce their ongoing living expenses. When we talk about “down-sizing” we mean that the Seller may have to rent a property for a couple years until their credit improves and they can apply for another mortgage. In some cases it may be possible for the seller to obtain an FHA loan to buy a new home immediately after selling a property via a short sale but the new property must be “smaller” than the original house.
- If the home owner’s (Seller) lender does not approve a short sale and they foreclose on the home owner, it could take as long as 7 years before the home owner’s credit is restored to make it possible for the home owner to qualify for another mortgage.
- From the perspective of the Buyer there is often an opportunity to purchase a property below “true market value” via the short sale process because lenders often are willing to allow the property to be sold at a discount from perceived market value. The reason for this is that the lender incurs significant expenses and risk if they foreclose and become the owner of the property.
- Unfortunately the short sale process can take many months and it requires knowledge that Buyers and Sellers do not normally posses. It is very important that Buyers and Seller form a relationship with a real estate agent that understands how to negotiate a short sale with the lenders.