A short sale in real estate happens when you are selling your home and your mortgage lender agrees to allow the home to be sold for less than the current value of the mortgage, most often accepting the terms of the sale as payment in full for the outstanding loan.
Every lender has different rules, but most lenders will require that the person(s) holding the mortgage need to demonstrate the existence of a hardship which is causing them to have to sell their home now, rather than continue to live in it and make their mortgage payments. Hardship reasons which have been acceptable include:
- medical emergency or death
- job loss
- job transfer
- bankruptcy
- divorce
Short sales have a negative impact on your credit, especially if you were also delinquent on your mortgage payments prior to the short sale, but are most often less negative than a foreclosure.
What to Expect When Selling a Short Sale
In addition to a negative hit to your credit:
- realize your lender has to agree to the terms of the short sale
- be prepared to write a compelling hardship letter to your lender, explaining why you must sell your home for less than you owe
- be prepared to submit supporting financial documentation, such as 2 years of tax returns, recent pay stubs and 2 months of recent bank statements
- there are real estate agents with special training in distressed sales; seek several out and interview them (if your lender agrees to the terms of the short sale they will be agreeing to pay the agent's commission)
- if you were delinquent on your mortgage at the time of the short sale, you will probably not qualify for an FHA mortgage for 3 years
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expect to walk away from the sale of your home with no money, not even any equity you thought you had
What to Expect When Buying a Short Sale
Buyers often make the mistake of assuming that both the seller and the lender are so desperate to get the house sold that any offer is a good offer, or they enter into a short sale transaction without the time or patience to wait for the lender to complete a due diligence decision making process.
Often the only incentive a seller has in the short sale is a choice between bad and worse. Sellers are usually anxious to avoid foreclosure, but since they are walking away with nothing (and can potentially be held liable for the difference between the selling price and their mortgage balance amount) they are not inclined to accept ridiculous offers.
- You may be able to pick up a good home at slightly under market value, but short sales take lots of time to close
- If you are in a volatile market with declining prices, your "bargain" might not be such a bargain by closing day
- Short sale sellers usually have not had the money to maintain their homes, so there could be issues
- Short sale homes are sold "as is" since the seller can't afford to make repairs
- The seller's lender has to approve all of the terms of the sale
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Short sales can take months to get approved, if you don't have months to wait don't consider a short sale
Legal Assistance Pays
If you are planning to purchase a short sale, consider working with an attorney as well as a real estate agent. Spending money up front on a title search can alert you to hidden issues that might cause the seller to be unable to pass clear title to you. If you are selling a short sale, an attorney can help you negotiate terms with your lender and make sure you exit the transaction with no further financial obligations relating to your mortgage.
