Published by FOX Business Personal Finance | January 19, 2021
A short sale, also called a pre-foreclosure, happens when a homeowner sells their house for less than what they owe on their mortgage.
If you’re in the market to buy a house, it’s a good idea to explore all your options. One option is a short sale. Because a short sale is a relatively uncommon type of real estate transaction, you might have heard the term but wonder what it means.
It’s possible to get a great deal on a short sale house, but the short sale process is typically complex. It works for some people, but it isn’t for everyone. Here’s some information to help you decide if buying a short sale home is the right move for you.
A short sale in real estate, also known as a pre-foreclosure, occurs when a homeowner sells their house for less than their mortgage balance. Sellers of short sales aren’t selling at a lower price to give you a break — they’re doing so because they’re in financial distress and can no longer make their mortgage payments. Selling the house short is usually a better option for the homeowner than allowing the home to go into foreclosure.
Short sales were more common during the years directly after the housing crash of 2008 because home values plummeted, leaving many people with a mortgage greater than the home’s value — a situation called “being underwater” on the home. Those owners couldn’t sell their homes for what they owed and didn’t want to continue paying a mortgage greater than the home’s value.
You won’t see too many homes being sold as short sales anymore since right now houses tend to hold their value or even appreciate. That means you can often simply sell your home for market price and pay off the lender. Short sales, therefore, can be somewhat difficult to find, but they’re still out there.
The lender needs to approve the sale
The mortgage lender needs to approve the short sale for the process to happen. First, the homeowner sends the lender a hardship letter, explaining the situation. If the lender approves the short sale, that lender has two options: forgive the remaining balance the homeowner owes, or go after the owner for the amount still owed, called the deficiency.
Say, for example, the lender allows the owner to sell the home for $400,000, but the owner owes $450,000 on the mortgage loan. The deficiency is $50,000. The lender can either forgive the deficiency or seek a deficiency judgment against the borrower. Lenders can use methods such as garnishing wages or withdrawing from the owner’s bank account to get the money back.
Short sale vs. foreclosure
Both a short sale and foreclosure are the result of a homeowner not being able to make their mortgage payments anymore. With a short sale, the homeowner takes action to minimize the damage to their credit score by selling the house, with approval from the lender, for less than what they owe.
With a foreclosure, where the bank takes back the home, the lender initiates the procedure. The foreclosure process usually starts after a homeowner stops making between three and six mortgage payments. Both a short sale and a foreclosure result in the homeowner losing the home.
What are the benefits of a short sale? Continue reading to learn more.
