If you find yourself behind in your mortgage payments and facing foreclosure, your lender may ask you about short selling your property. What does that mean? Use this guide to determine what it is to short sale your property.
Short sales became a hot topic in the 2008 financial crisis. Homeowners around the world opted to short sell their properties after finding themselves behind on mortgage payments. While the housing market has improved since, a short sale is still a suitable alternative for many homeowners who are on the brink of losing their homes.
A short sale is the option of selling a property for less than its existing mortgage balance. This happens when a homeowner fails to keep up with his or her mortgage fees. The buyer of the property is a third party (not the bank or the lender), but all the proceeds from the home sale go to the lender or mortgage provider. This process has to be done in collaboration with the lender (or lenders for those with a second mortgage with a different company). Obviously, the lender has to approve the sale.
For example, a homeowner may sell a property for $185,000, even when there is still $200,000 remaining on the mortgage. The difference between the mortgage and short sale is $15,000, which is called the deficiency.
After the sale, the lender has two options: they can absolve the homeowner from paying the remaining balance, or they can go after the homeowner through a process called ‘deficiency judgment,’ which will require the latter to pay for the differential amount.
A short sale in real estate is different from a short sale in financial investing. For the latter, a short sale means a transaction where the seller gets rid of borrowed securities in anticipation of a decline in its value; the investor is required to return an equal number of shares at some point.
These are some situations when short selling your property makes sense.
After the housing market crash in 2008, the values for real estate properties continued to rise. In some states, the housing market has recovered significantly faster than others. This becomes a problem for homeowners looking to sell their property and move to a different area; they cannot get enough money from the sale to start a new life (and get a new house), since they have to pay off their mortgage.
A short sale is a better alternative than foreclosure. While it is definitely not a “get out of jail” card, as it can still appear in your credit score, it can provide some form of financial help for homeowners in dire situations.
Here are some of the reasons to short sale your property:
The process of short selling is long and tedious. It requires tons of paperwork and has many steps. The whole process can last from 120 days up to 12 months, depending on your specific situation. This is because it is the lender who manages the sale; they have to agree to the sale. However, short sales are way better than foreclosure for your credit rating.
Before the short sale process starts, the lender needs to sign on the decision to allow the commencement of the short sale. This is called a ‘pre-foreclosure’ sale. The homeowner will be asked for documentation that explains why the bank should accept the short sale. Obviously, the explanation must make sense, since the lending institution will be losing money in this process. Again, the lender must approve the short sale request.
After the approval of your request, your mortgage provider will then work with you and your real estate agent to:
Get price guidance for your property
Send in your best purchase offer to your lender and any junior lien holder (if needed)
Agree to the terms set by the buyer’s agent
Access closing instructions from your lender (after approval of a short sale) to close the sale
You need to know that short sales may not always get rid of the remaining deficiency in your mortgage debt, even after the property is sold. This is because mortgages usually have two parts – the lien against the property used to secure the loan, while the second one is the promise to repay. For the first one, lenders are protected by liens in case a borrower cannot repay the mortgage loan. This gives the lending service provider the right to sell your property to cover the mortgage payments owed.
Secondly, in some states, lenders can still request the payment of the deficiency in the mortgage, either through a new note, or the deficiency of the collection. Whatever it is, it is the lender who needs to approve the short sale. This puts borrowers at their whim.
A short sale will still hurt your credit score. But it will not have as much impact as a foreclosure. Note that any form of property selling that has been denoted by a credit company as ‘not paid as agreed’ can affect your credit score. Thus, short sales, along with foreclosure and deeds-in-lieu of foreclosure, will have a negative impact on your credit score.
Short-sale properties also give homebuyers the opportunity to buy a property for less money. In many cases, short-sale properties are in reasonable condition. However, both the buyer and the seller of the short sale property must be willing to wait.