What is a Short Sale?
A short sale is a real estate transaction where a homeowner sells their property for less than the outstanding balance of their mortgage. This typically happens when the homeowner owes more on their mortgage than the home is currently worth, a situation often referred to as being “underwater” on their mortgage.
How a Short Sale Works:
- Homeowner’s Hardship: The homeowner experiences a financial hardship (e.g., job loss, medical bills) that prevents them from making mortgage payments.
- Contacting the Lender: The homeowner contacts their mortgage lender to explain their situation and request permission to conduct a short sale.
- Listing the Property: The homeowner lists the property for sale, usually with a real estate agent, at its current market value, which is below the outstanding mortgage balance.
- Offer Submission: Once an offer is received from a buyer, the homeowner submits it, along with supporting financial documentation and a hardship letter, to the lender for approval.
- Lender Review and Approval: The lender reviews the offer to determine if it’s acceptable. This process can be lengthy, as the lender may need to get approval from investors or private mortgage insurers.
- Closing: If the lender approves the short sale, the transaction proceeds to closing. The sale proceeds are paid to the lender, who accepts less than the full amount owed.
Key Considerations:
- Forgiveness of Debt: Lenders may agree to forgive the remaining debt (the “shortfall”), or they may pursue the seller for the difference. This depends on the loan terms and lender policies.
- Credit Impact: A short sale generally has a less severe impact on a homeowner’s credit score compared to foreclosure, though it will still be negatively affected.
- Buyer Patience: Buyers in a short sale must be prepared for a potentially long and uncertain closing process due to lender involvement.
Short Sale vs. Foreclosure:
A short sale is often preferred over foreclosure because it allows the homeowner to sell the property on their terms and can have less damaging consequences for their credit. Foreclosure involves the lender repossessing the property, which is a more costly and damaging process for the homeowner.
Sources:
Consumer Financial Protection Bureau – What happens if you can’t pay your mortgage?
Investopedia – Short Sale
Realtor.com – What Is a Short Sale?