A short sale is when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. For example: A homeowner, who is facing foreclosure, has an existing first mortgage of $300,000. You write an offer to the lender for $220,000, which is accepted as full payment for the loan. This is done by the buyer or investor providing proper documentation to the mortgage lenders to convince them to reduce the mortgage balance to allow the sale. The mortgage lender (or bank) actually takes a loss on the mortgage because the value of the home has fallen below the mortgage balance AND the homeowner is in a poor financial condition that will not allow him to continue to pay on time. This is a short sale. Why are they willing to take such a discount? Several reasons. Banks do not want to own real estate, they want to lend money and collect interest. When a bank takes a property back via foreclosure, it is a long and expensive process and often results in holding the property in their inventory as a nonperforming asset. Banks have a limit to the amount of non-performing assets they want to hold. Once this limit is exceeded, they have strong incentive to get rid of the properties at discount prices. For a lender, doing a short sale avoids many of the costs associated with the foreclosure process. Attorney fees, delays from borrower bankruptcy, damage to the property, costs associated with resale, property tax, insurance, etc. all must be paid by the bank during a foreclosure. In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster.
Benefits of a Short Sale
1. The upside down house debt is erased in most cases. If you are selling because of a
financial hardship, then the upside down house debt will be automatically erased in most
cases. If your loan is owned or insured by the following agencies: Fannie Mae, Freddie
Mac, FHA, USDA, and/or VA; their policies state that your short sale debt will be erased
2. You are eligible to buy another home much sooner compared to a foreclosure. The
most common loan programs, Fannie Mae and FHA, stipulate that you can buy another
home under their programs in about 2 to 3 years.
3. Short Sale is at NO Cost To You. That is right. A short sale costs you nothing. ALL the
selling expenses are paid by your lender. That includes the title insurance, attorney fees,
agent commissions, and back taxes.
4. Your credit suffers much less damage. Many people think that a short sale
will be the kiss of death to their credit. The opposite is true. That is the one big advantage
of a short sale over a foreclosure. And your credit rebounds much more quickly with a
short sale versus foreclosure. The other benefit is that you will have less debt. (More debt
hurts your credit score.) You will have a lower debt to income ratio, which could actually
boost your credit scores. Within a couple of years or less, your credit will be back to
normal or even higher than before you short sold, and now you can even buy another
home if you want.
5. You can often rent a comparable house for less than your former mortgage payment.
I often see homeowners rent larger, nicer homes for less money in the very same areas
and neighborhoods they short sold in.
6. You avoid the humiliation of a foreclosure. Neighbors know when foreclosure occurs.
Not so with a short sale. With short sale, your listing looks like all the other normal seller
listings in the neighborhood.
7. You don’t have to pay rent or make payments during the short sale process. Most
short sales take 3 to 12 months to complete. Most people do not make mortgage payments
during the short sale process (but do continue to live the house). You can use that savings
of not having to make house payments or rent payments to relieve other financial
pressures in your life.
8. You will likely qualify for some type of cash at closing incentive. These cash
incentives range from $2,000 to as high as $35,000 and are being paid by Lenders, the
U.S. Treasury (HAFA), and FHA (HUD) to Short Sale your home (versus be foreclosed
on). You can use this money you receive at closing for moving and relocation costs (or to
just get back on your financial feet).