If you’re in the market to purchase a new home, and filtering through real estate listings, you may come across a house that is listed as a short sale. Short sales may seem desirable because they are typically listed at a discounted price. But what exactly are these types of sales and what do they mean?
Why does a home go into a short sale?
When a homeowner is in financial trouble, they may sell their home for less than what they owe on their mortgage. This is a short sale. Rather than waiting for the bank to foreclose their house, the homeowner will initiate the short sale process. The homeowner will submit an application to their lender. While reviewing the application, there are a few things the lender takes into consideration before approving or denying the short sale.
The lender will require the seller to prove their financial hardships. The homeowner will need to be able to show that they don’t have assets or income to be able to pay the remaining amount of their mortgage. The lender also needs to review comparable properties that were recently sold. This is to determine that the home is worth less than the amount that is owed.
Once a home sells through a short sale, the lender of the original mortgage will receive all proceeds from the transaction. They can get a deficiency judgement against the original owner that states that they need to pay the balance. Or, the lender will forgive the financial difference.
Short Sales Vs. Foreclosures
Short sales and foreclosures are often confused, yet very different. In the case of short sales, the homeowner realizes and accepts responsibility for their financial struggles. They are the ones who initiate the process since they cannot keep up with paying their mortgage. In foreclosures, the lender forces the sale and the bank repossesses the property. Short sales take a lot more time than foreclosures do, since they’re so complex. Most homes that are foreclosed are abandoned. If they aren’t, the residents will be evicted. The home will be sold traditionally through an agent or at an auction. Both can unfortunately damage credit scores.
Alternatives To Short Sales
Before submitting an application to your lender about a short sale, you can speak with them about the possibility of a loan modification, or revising your payment plan. This way, you may be able to remain in your house while trying to financially get back on your feet.
Another option is if you have a PMI, or private mortgage insurance. If the company you have your PMI through thinks that you will be able to recover from your current hardship, they may help by advancing payments to your lender so you are caught up with your payments. However, you will of course need to repay the PMI company.
Pros Of A Short Sale
Short sales have the opportunity to be beneficial for both buyers and sellers. They minimize the financial repercussions that the sellers and lenders would have if the home went into foreclosure, while providing great investment opportunities for buyers.
Pros for sellers
- Prevents foreclosures: Short sales prevent foreclosures, so the homeowner’s credit score won’t be as detrimentally impacted.
- Cost savings: Generally speaking, sellers would be the ones who paid for the agent’s commissions. However, lenders pay the fees in a short sale.
- Absorption of debt: The home buyer will ultimately pay off most of the seller’s debt.
- Possibility of debt forgiveness: The lender may not require the original homeowner to pay back the balance.
- Housing market reentry: A short sale can enable the seller to reenter the market and obtain a mortgage immediately with an FHA loan under the right circumstances.
Pros for Buyers
- Lower price: The lender is motivated to sell to cut ties and losses, so buyer’s usually get a better deal purchasing a short sale home.
- Not as competitive: Compared to traditional real estate transactions, short sales are complicated. This generally means fewer buyers are interested in dealing with short sales, and therefore have a good chance with getting their offer accepted.
Cons Of A Short Sale
Even though there are many benefits associated with these sales, there are also several cons. They take a lot longer since they are more complex. This can cause a negative impact to all parties involved. They’re also usually sold “as-is”, which is risky to potential buyers. Since short sales occur due to financial hardships, the properties aren’t always in good condition. This means the buyer will have to spend more money after closing on the home to fix it up. The sellers have no negotiating power, and don’t profit off these sales.
Is It Right for You?
As a seller, if you are financially strapped and can’t recover, this may be the best route for you to take. If you need to walk away from your home without having it foreclosed, you can do so. As a seller, once you figure out your financial situation, and weigh the pros and cons of purchasing a short sale, you can decide if it’s right for you. If you have time to wait for this fairly long process, and extra money allotted for repairs and renovations, the short sale has the potential to be a great investment. If you decide to purchase or sell a home, consider working with Trelora. Their experienced agents can help you navigate through unique real estate transactions, while saving you your hard earned equity.