What is a Short Sale?
A short sale in real estate occurs when a homeowner sells their property for less than the amount owed on the mortgage. The lender must agree to accept less than the outstanding loan balance as full payment. This process is typically used as an alternative to foreclosure, helping both the homeowner and the lender minimize losses.
How Does a Short Sale Work?
- Financial Hardship: The homeowner faces significant financial difficulties, such as job loss, medical bills, divorce, or other financial burdens that make mortgage payments unmanageable.
- Property Valuation: The home’s market value has dropped, making it worth less than the remaining mortgage balance.
- Homeowner Decision: The homeowner decides to pursue a short sale, recognizing it as a better option than foreclosure.
- Lender Approval: The lender must agree to the short sale. This involves submitting a short sale package, including a hardship letter, financial statements, and a comparative market analysis to prove the home’s reduced value.
- Listing the Property: The property is listed on the market by a real estate agent. Potential buyers make offers, but the sale is contingent on lender approval.
- Lender Decision: The lender reviews the offer(s) and decides whether to accept one. This process can take several weeks to months as the lender evaluates the homeowner’s financial situation and the offer’s validity.
- Negotiation: Sometimes, the lender may counter the buyer’s offer to get a higher price.
- Closing the Sale: If the lender approves an offer, the sale proceeds, and the lender receives the sale amount. The homeowner is typically released from the remaining mortgage debt, though this depends on the agreement.
Example of a Short Sale
Imagine a homeowner, Jane, who bought a house for $300,000. Due to a market downturn, the house is now worth $250,000, but Jane still owes $280,000 on her mortgage. Jane loses her job and can no longer afford her mortgage payments.
Jane decides to pursue a short sale. She finds a buyer willing to pay $250,000. She then submits this offer to her lender, along with her financial hardship documents. The lender reviews and agrees to accept the $250,000, forgiving the remaining $30,000 of the loan balance.
Key Points to Know
- Credit Impact: A short sale will negatively impact the homeowner’s credit score, but it is generally less damaging than a foreclosure.
- Deficiency Judgment: Some states allow lenders to pursue the borrower for the remaining debt (the deficiency). It’s important to understand local laws and negotiate with the lender to avoid this.
- Tax Implications: The forgiven debt might be considered taxable income. Homeowners should consult with a tax professional to understand potential tax liabilities.
- Cost to Homeowner: Homeowners typically don’t pay real estate agent fees in a short sale, as these are usually covered by the lender.
- Future Home Buying: Homeowners can often qualify for a new mortgage sooner after a short sale than after a foreclosure, though it may still take a few years.
FAQs About Short Sales
1. How long does a short sale take?
A short sale can take several months to complete, often between three to six months, but sometimes longer depending on the lender’s approval process.
2. Can any homeowner do a short sale?
Not necessarily. The homeowner must demonstrate financial hardship, and the lender must agree to the short sale terms. Additionally, the property’s market value must be less than the mortgage balance.
3. Will I owe money after a short sale?
This depends on state laws and the lender’s policies. Some lenders may forgive the remaining debt, while others may pursue a deficiency judgment for the balance.
4. How will a short sale affect my ability to buy another home?
A short sale will impact your credit score and may affect your ability to get a new mortgage for a few years. However, it is usually less severe than a foreclosure, and some lenders offer programs to help homeowners recover sooner.
5. Is a short sale better than foreclosure?
Generally, yes. A short sale is less damaging to your credit score and can be less stressful than the foreclosure process. It also allows the homeowner more control over the sale process.
6. Do I need a real estate agent for a short sale?
Yes, working with a real estate agent experienced in short sales is highly recommended. They can help navigate the complex process, negotiate with the lender, and market the property effectively.
7. What happens to the remaining loan balance in a short sale?
The lender may forgive the remaining balance, but this must be explicitly stated in the short sale approval letter. If not, the lender could potentially seek a deficiency judgment to recover the difference.
Conclusion
A short sale can be a viable option for homeowners facing financial difficulties and a declining property market. It involves negotiating with the lender to accept a sale price lower than the mortgage balance. While it has its challenges, understanding the process and implications can help homeowners make informed decisions and potentially avoid the more severe consequences of foreclosure.