What Is a Short Sale?
Although they may have heard the term before, homeowners often contact real estate professionals or attorneys with the question, What is a short sale? In the most basic terms, it is the sale of a property that does not yield enough funds to cover the total debts against it. It is often considered as an alternative to foreclosure when the homeowner cannot make regular monthly payments and both the borrower and lender wish to avoid the time and money associated with a foreclosure suit. Because the lender agrees to the lower amount, the sale is considered satisfaction of the loan rather than a default. In 2013, over 300,000 homes in the United States were sold through this process rather than at foreclosure auction, allowing hundreds of thousands of homeowners to rebuild their lives without the stigma or lingering debts associated with foreclosure.
How Can it Help Homeowners?
Since it is a real estate transaction, not a legal proceeding, the process empowers homeowners to work closely with their lender to find a mutually agreeable solution to foreclosure. In a financial crisis, homeowners are often frustrated by the lack of options available to them and upset about the prospect of losing their home. Although they may want to save their home, it may not be financially feasible. The alternative is working with someone who can help guide them get through the process as efficiently as possible. An experienced real estate professional can offer a welcome recourse to a potentially painful, drawn-out legal process.
For a distressed homeowner who has been unable to sell their home at a price high enough to cover the total debt or who has other circumstances that make listing the property an unrealistic option, the process can be a quicker and less stressful alternative to the uncertainty of foreclosure. It can also be the most attractive option for the lender, as lenders save substantial money on the attorney’s fees associated with a foreclosure suit. Banks and homeowners can work together rather than on opposite sides of a foreclosure, resulting in a less stressful process.
Here is an example: Ms. Jones owes $280,000 for the home she purchased ten years ago. When she lost her job last year, she applied for and received a loan modification from her lender. She made the mortgage payment from her retirement fund and immediately listed the home for sale with a realtor. She priced it attractively and reduced the price several times at the advice of her real estate agent; however, due to the current market, her home is worth significantly less than she owes. In the past eighteen months there have been no viable offers on her home. She is now in default, and her lender has initiated a foreclosure suit against her. Since she has no means of making any type of mortgage payment, loan modification is no longer an option for her. Ms. Jones must now negotiate with the lender and find a solution that works for everyone.
The process is also a way for homeowners to avoid owing a deficiency balance. When a home is sold in a foreclosure auction for less than the total debt, the deficiency balance is the amount still owed by the borrower. In the example of Ms. Jones, if her house sells at a foreclosure auction for $230,000, her deficiency balance is $50,000. Even though she no longer owns the home, she is still responsible for the $50,000 debt, which can follow her for years and wreak havoc on her credit. In a short sale process, however, the bank agrees to the sale of the home at a price below what is owed, and there is no deficiency balance. Ms. Jones sells the home at the agreed amount and may now move on from a difficult situation without the credit damage associated with foreclosure.
How Does it Work?
Any sale for an amount below the loan balance must be approved by the lender. Homeowners complete an application packet, similar to the paperwork required in the loan modification process, including proof of financial hardship. The lender will want to ensure that selling the home at a loss is the most appropriate course of action and that there is not some other option, such as loan modification, which would be better suited. Some lenders require that the home is listed on the market for a certain period of time prior to attempting the process. Communication with the lender is critical for determining what parameters to follow.
It is important to find a real estate professional who is experienced with the process, as lenders have specific guidelines that must be followed. A specialist walks homeowners through the steps required and assists them in every facet of the transaction. The lender decides on an acceptable price range, and the home goes on the market. When a buyer is found and the transaction is complete, the homeowner is no longer in debt to the lender.
A mortgage hardship can be extremely stressful, but it doesn’t need to be a devastating event for homeowners. Rather than face foreclosure and bankruptcy, homeowners can maintain some control over the process and avoid some of the anxiety that comes with financial uncertainty. There are also government initiatives through which homeowners may qualify for cash incentives after their transaction has been completed. These incentives are a means of assisting homeowners who have ultimately saved the lender hefty legal fees, and are useful for moving and starting over with a clean slate.
Homeowners who are uncertain if they qualify for the short sale process should contact both their lender and a specialist to learn more about the options available to them. They may qualify for a short sale, which ultimately keeps them in a proactive position, frees them from unnecessary debt, and offers them a fresh start.