Help in Understanding a Short Sale
By Oliver Darraugh
When a homeowner falls behind on the mortgage payments and needs or wants to sell the property before it goes into foreclosure, it is known as a short sale. In this case, the homeowner would need to provide the lender with a proposal of wanting to sell the home in a short sale. Otherwise, the homeowner would be faced with risk of foreclosure. At that point, the lender would determine if the best decision would to take a small to moderate loss with a short sale or risk a significant loss via foreclosure. However, for the short sale to take place, the homeowner and lender would need to agree.
An example, if a homeowner were at risk of losing the home to foreclosure and had an existing mortgage of $300,000, a proposal of $250,000 might be presented to the lender, which would be considered full payment against the mortgage loan. The reason banks and other lending institutions approve a short sale is that having too many "bad loans" or a huge inventory of foreclosed homes puts them at serious financial risk.
For this reason, most lenders prefer a short sale at a real estate auction to a foreclosure. In addition to risk of huge financial loss with foreclosure, there are also significant fees. Instead, the short sale reduces risk and is a more convenient solution. Keep in mind, discounts that go along with a short sale would have nothing to do with the type of home or even the current condition. However, homes in the worst condition actually sell better in a short sale because investors want a bargain.
Additionally, the home in disrepair also allows lenders to offer better discounts. Now, along with the proposal, most lenders need additional persuasion proving reasons that a short sale is the right decision. For instance, if the home were in an area where other homes are not being sold or perhaps in a less than desirable location, the lender might be convinced.
The negative side of a short sale for the homeowner is that his or her credit score would be negatively impacted, often less than affect from a foreclosure. Unfortunately, the negative report would remain on the credit history for as long as seven years, which would depend on other types of financial information being reported. Even with a foreclosure or short sale, many people can still be approved for another mortgage loan in two to three years.
The best time for a short sale is when the homeowner is 90 days behind on mortgage payments, has no other options for getting out of the situation, or does not have much equity built up. Often, a short sale would be used as a type of exit strategy even for homeowners that are not behind on payments. This way, the property is sold and the person's credit not affected.
Typically, doing anything possible to avoid foreclosure is what most homeowners want, which is why a short sale is so appealing. The combination of a bad financial situation, and again, being behind on payments three to four months means that a foreclosure is the next thing coming. Obviously, the property going through foreclosure eliminates mortgage payments and does not require any repairs to be made. In addition, the credit report is usually not affected as bad as with a short sale.
Obviously, a decision such as this requires guidance from a real estate and/or financial expert. Then if the short sale is approved, an expert would help negotiate the process and money, which could make a significant difference in the amount of money the home actually sells for, which could be tens of thousands of dollars that goes back to the lender.
Even with some positive aspects of a short sale, all homeowners need to take this action seriously. Then, when looking for a real estate agent to help, this person should be highly respected and knowledgeable of short sales. Most agents only know the term but have no real understanding of how it all comes together. The wrong agent could turn a bad situation into an even worse situation so this too is a very important decision.
Oliver Darraugh is one of many real estate specialist sell to rent experts.