What is a Short Sale?
A real estate short sale occurs mortgage holder accepts less than the full balance of the remaining mortgage loan at closing. Any sale of real estate that yields proceeds below the amount owed on the property is considered a short sale.
A short sale transaction occurs when the mortgage holder (lender) and the property owner (buyer) agree that selling the property and absorbing the marginal loss is preferable than a default and subsequent foreclosure. A real estate short sale may only be accomplished by mutual consent of the lender and borrower. When affirmed, both parties can benefit greatly from a short sale; borrowers avoid a foreclosure while the lender can avoid the substantial fees and exposure to risk associated with the impending foreclosure and/or subsequent auction.
A short sale can be a fantastic solution for a homeowner who has multiple homes, is required to sell a property or is facing a default on their mortgage. Due to the collapse of the real estate market and overwhelming macro-economic changes, banks and mortgage holders have become far more negotiable when it comes to short sale transactions—in the past, banks were hesitant to engage in short sales.
Why would a Bank or Mortgage Holder Engage in a Short Sale?
A bank or mortgage holder will engage in a short sale for the following reasons:
• The bank wishes to get rid of its inventory and bad loans
• The mortgage is in foreclosure or arrears
• The area features a lot of new properties, which are being chosen over existing ones
• The homeowner faces an economic hardship which prevents him/her from making payments
• The underlying property is in poor condition
• The bank’s shareholders are expressing concerns regarding the amount of toxic debts on the books
• The surrounding area has depreciated in value
• The short sale eliminates exposure to substantial risk in the future
What are the Steps of Purchasing a home via Short Sale?
1. Find a property or homeowner in distress
2. Negotiate a deal with the homeowner
3. Have the homeowner sign an authorization to negotiate a short sale or express consent in the transaction
4. Fill out a sales contract for the amount you want to offer the mortgage holder and have the homeowner sign it
5. Call the bank’s or mortgage holder’s loss mitigation department and fax them the offer along with a cover letter explaining your inability to offer full price, the sales contract, a closing statement, a hardship letter from the owner and a schedule to document costs of repairs
How Does a Short Sale Affect Credit Ratings?
When a successful short sale is negotiated, the agreed upon price is deemed as a payment in full. That being said, the homeowner may still owe the difference between the discounted value and the mortgage balance, known as the deficiency judgment. If granted, the deficiency judgment will affect the homeowner’s credit score as any other judgment would.