What Is A Short Sale?

What is a short sale?

A short sale — sometimes known as a preforeclosure sale — is when a mortgage lender allows a borrower to sell their home for less than they owe on the mortgage. The lender may accept this payoff and forgive the difference, releasing the borrower from the debt. However, in some cases, the borrower may still be liable for the gap between the sale price and their mortgage balance.

A short sale can only happen with the lender’s permission, and a lender won’t agree to it unless the seller successfully demonstrates hardship. But foreclosure is a time-consuming and expensive process, so lenders would also prefer to avoid it if possible.

Short sales aren’t as common now as they were in the 2008 housing bust and recession, but they’re still an option for homeowners today. They tend to increase when home values are declining, and borrowers are more likely to end up with a larger mortgage balance than the amount they could reasonably expect to get from a buyer. This is known as having an “underwater” mortgage or negative equity.

Short sale vs. foreclosure

Both a foreclosure and a short sale result in the loss of your home, and both hurt your credit, but they’re not the same thing.

Foreclosure is the process by which a lender repossesses a home from a borrower who has stopped making mortgage payments. If the borrower doesn’t bring the loan current, the lender can sell the home, typically at auction, to try to recoup its losses.

A short sale, on the other hand, is voluntary. A borrower might initiate it because a short sale has less negative impact on credit than a foreclosure.

How does a short sale work for a seller?

1. Provide a hardship letter

The first step of the short sale process is negotiating the sale with your mortgage servicer. The time to do this is when you’re in preforeclosure, not when your servicer has already initiated foreclosure proceedings. Write a letter explaining that a legitimate financial hardship prevents you from continuing to pay your mortgage.

Possible hardships include:

• Losing your ability to work due to disability
• Health-related issues
• Divorce
• Death of your partner

Along with the letter, your servicer might require documentation verifying your hardship, such as bank statements and copies of bills.

2. List your home with disclosures

Unless you plan to go it alone, you’ll need a real estate agent to help price and list your home. Not every agent is experienced in short sales. Before committing to a listing agreement, ask at least three agents for a listing presentation to get a sense of their knowledge, skills and selling plan.

When it’s time to put the home on the market, make sure the listing description discloses that the property is a short sale. From there, your agent will market your home to buyers much in the way they’d market a regular sale. If your home needs considerable work, your agent might target more house-flipping or investor clients.

3. Submit the offer to your lender

Once you accept an offer, you’ll submit it to your servicer for review and approval. This process can take time, and the servicer might not accept the initial offer price, leading to additional negotiation with the buyer. Ultimately, there’s no guarantee the servicer will approve the offer.

How does a short sale work for a buyer?

1. Figure out the financing

Whether you’re buying a short sale or another type of home, you have to know how you’re going to pay for it. In a short sale, you often need to move quickly — some lenders, for example, require closing in as few as 20 days. Being preapproved is essential.

2. Identify which properties to go after

Before touring short sale properties, decide how much you’re comfortable spending on renovations. This — along with your financing — can help you settle on a budget. An experienced real estate agent will help you find preforeclosures — which are prime candidates for short sales — that are in your price range.

When you’re ready to make an offer, ensure that it aligns with market value. While you might be able to get a deal on a short sale, you can’t buy one for next to nothing. Your offer needs to be one that the servicer will accept.

3. Put together a proposal and schedule an inspection

When you find a home you like, and you and the seller agree on a price, your agent will organize a proposal for the seller’s servicer. This package includes:

• The purchase and sale agreement
• The appraisal report
• An authorization letter — signed by the seller and notarized — that permits the lender to discuss the seller’s loan with you.

Additionally, many lenders require the buyer to fill out a specific short sale application.

While the lender reviews the proposal, you’ll have the home inspected. This step is crucial. If the home is in exceptionally poor condition, consider walking through it with a contractor as well. Your lender will also order a title search to confirm there are no undisclosed liens on the home.

The lender might reject your offer or return with a counteroffer. If it’s accepted, you’ll then work with your own lender — and, ideally, a knowledgeable real estate attorney — to get your loan underwritten and closed.

What are the pros and cons of a short sale?

The reality is that short sales are a mixed bag for the buyer, the seller and the lender or servicer. Everyone gains something but gives up something, too.

Short sale pros for sellers

• Avoid foreclosure and eviction
• No longer responsible for a mortgage payment

Short sale cons for sellers

• Credit takes a hit
• Walk away from sale with no cash for a new home
• Potential for deficiency judgement
• Forgiven debt may be taxable

Short sale pros for buyers

• Purchase property at a reduced price
• Less competition than buying a home the traditional way
• More information than when purchasing a foreclosed home, as the short sale process requires disclosure of property conditions

Short sale cons for buyers

• Property may be in poor condition
• Short sale process takes longer than a typical home purchase

Short sale pros for lenders

• Avoid paying for and waiting for the foreclosure process to sell the home
• Receive partial repayment of the mortgage

Short sale cons for lenders

• May not receive full repayment of the mortgage
• Home may be in poor condition, which could make it difficult to sell

FAQ

• Can you negotiate a short sale price?
  

  While it’s possible to negotiate the purchase price for a short sale, there’s no guarantee the seller’s mortgage lender will approve the price. It’s also unlikely the seller will be able to make concessions or assume additional closing costs.

• How long does a short sale take?
  

  A short sale can take as little as a few weeks or as long as several months. Because short sales are complicated transactions, they tend to be more time-consuming.

• What are the alternatives to a short sale?
  

  One alternative to a short sale is moving out and allowing the mortgage lender to foreclose the home. A foreclosure makes it hard to get a mortgage and other types of credit in the future, however, so this should be a last resort, not your first option.

  If your hardship is temporary, your lender might offer you forbearance instead. In this arrangement, the lender agrees to suspend or reduce your monthly mortgage payments for up to one year. You’ll then pay back what you missed with a repayment plan. You can also try refinancing your mortgage, though that might be difficult if your finances are shaky.

  Another potentially better option is a loan modification, which permanently changes your loan terms so that the monthly payments become more affordable. Unlike a refi, a loan modification often doesn’t require a home appraisal, making it easier to get when your mortgage is underwater.