If you’re shopping for a home, you’ve probably come across properties listed as “foreclosures” or “short sales.” What do these terms mean? What are the pros and cons? In this post, we’ll get into short sales – what they are, and what they mean for the people involved in them. Also remember to check out Part 1: Foreclosures.
What is a Short Sale?
Short sales are probably the most popular foreclosure alternative today. A short sale, also known as a pre-foreclosure sale, is when your lender allows you to sell your home for less than you owe on the mortgage. A short sale is only possible when all parties involved, including the homeowner and the lender, agree to sell the home for less than what is owed on the mortgage. This allows the homeowner and the lender to avoid a foreclosure, and can provide buyers with a good deal on a home.
A short sale may be an option for you if:
- You are unable to refinance your mortgage
- You are behind on your mortgage payments
- You owe more on your home than it’s worth
- You haven’t been able to sell your home at a price that will cover what you still owe on the mortgage
- You can’t afford the home anymore and need to leave
For the homeowner:
- Short sales don’t hurt your credit as much as a foreclosure, so you’ll be able to repair your credit and get a new mortgage sooner. Beware though, a short sale will still negatively impact your credit score.
- It may be possible to eliminate your mortgage debt
- May be able to obtain some relocation assistance
For the lender:
- Lenders often prefer short sales to foreclosures as the foreclosure process involves lots of cost and procedure to contend with
For the buyer:
- Buyers might be able to get a home that would normally be out of their price range
- Short sale homes are much less likely to be vandalized, damaged, or unmaintained than a foreclosure, since the homeowner is usually still living in the home until the short sale is completed.
For the homeowner, the lender, and the buyer, short sales share some negatives – mainly, they can take a long time… sometimes a very long time. Since the lender has to approve the sale price, there can be a lot of back and forth and waiting between buyer’s agents, seller’s agents, and the lender to reach a price that everyone can agree on. It can take a long time to reach an agreement on sales price, and sometimes an agreement is never reached. This can be hard on homeowners whose situation is uncertain until they sell the home, and stressful for a buyer if they don’t have a place to live while the short sale is dragging on.
Another con for the homeowner is that short selling the home does not guarantee that the deficiency on the loan will be forgiven. Let’s break down what I mean with an example:
- Let’s say several years ago, Mr. and Mrs. Smith borrowed $400,000 to purchase a home worth $400,000. A few years go by, and Mr. Smith has some medical bills and Mrs. Smith has lost her job, and they are having difficulty making their mortgage payments. They decide that they want to sell the home rather than keep paying for something they can’t afford. Mr. and Mrs. Smith still owe $350,000 on their mortgage, but the market has deteriorated and their home is now only worth $310,000. If the home is sold for that amount, a $40,000 deficit will remain that the sale of the home doesn’t cover.
If the homeowner don’t work out an arrangement concerning that deficit, they could end up stuck paying off that difference. Long story short, short sales can have a lot of benefits, but be prepared for what you’re getting into, no matter what side of it you’re on.
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