For homeowners unfamiliar with the details of a short sale, it is vital to inquire as to what they need to know. One of the most frequent reasons for a house seller to consider a short sale is when the property’s value drops. Is the house taking a long time to sell, or is the asking price too high?
What is a Short Sale?
A short sale in real estate is an offer to purchase a property for less than what is owed on the mortgage of the present owner.
When a house’s value has decreased, and the homeowner owes more on the mortgage than the home is worth, a short sale can only take place with the lender’s approval. In this case, the homeowner may need to sell the house because of negative equity.
A homeowner in financial difficulty turns to a short sale to sell the house before the lender forecloses and takes possession of it.
Short Sale vs. Foreclosure
Short sales are preferred to dealing with the procedure of foreclosure and then moving forward with handling a separate transaction since lenders accept that they won’t get their investment back in short sales. In a foreclosure, the lender seizes back possession of the home before trying to recoup some of its losses through a sale.
If a homeowner is behind on their mortgage payments, has an underwater home, or both, there are two possible outcomes: a short sale or foreclosure. In either scenario, the owner is compelled to sell their house, but the process and results are different.
Facts about a Short Sale
A short sale has special considerations. It is important to take into consideration the following features of a short sale:
- A short sale affects a person’s credit score less than a foreclosure, but it is still a negative credit mark.
- Short sales don’t always negate the remaining mortgage debt.
- The lender must approve the short sale, which means borrowers are sometimes at their whim.
Options for Short Sales
Before resigning yourself to a short sale, you may consider other alternatives.
Another short sale option is obtaining a loan modification, which may temporarily impact your credit score just like any application for new credit will. Speak with your lender to see whether a modified payment schedule or loan modification is an option. You might be able to stay in your house and choose one of these solutions to help you start again.
If you have private mortgage insurance (PMI), you may have another alternative to continue in your house. Many homeowners who put less than 20% down on their homes had to buy PMI along with their residences. If the PMI firm believes you have a chance to improve your financial status, it may advance money to your lender so you can catch up on your payments.
The Short Sale Process
Several steps are necessary to pull off a short sale.
Persuade the Lender
Struggling homeowners should consider the likelihood that the lender will agree to work with them on a short sale before starting the process. The lender’s cooperation is not required.
Instead of coming from something that was not reported when the homebuyer first filed for the loan, the source of the financial problems should be recent, like a health issue, the loss of a job, or a divorce. Stop buying unnecessary items to put yourself in a stronger position. When the lender evaluates your proposal, you don’t want to give the wrong impression.
Consult with experts
Speak with a lawyer, a tax expert, and a real estate agent. Even though these are pricy expert services, you risk getting into even more debt if you attempt to manage a challenging short-sale transaction on your own.
Set your Price
Ensure to include the cost of selling the property in the total amount you need to make from the transaction when determining the asking price. There will inevitably be a gap in a down market even though you wish to sell the house for as close to your mortgage amount.
Gather Your Paperwork and Look for a Buyer
Collect all the evidence you’ll need to show the lender that you are experiencing financial hardship. These could be divorce papers, financial records, medical bills, proof of income, and termination letters from prior employment.
It is up to you to make a suggestion. Be aware that since the lender will receive the funds from the short sale, the lender must finally authorize it after obtaining all the information.
Send the Bank Your Proposal
You are ready to present the buyer’s offer and proposal to the bank once you have a buyer and the required documentation.
Your proposal should contain a hardship letter outlining why you cannot make your mortgage payments and proof of your dire financial situation. You want to appeal to the bank while simultaneously protecting your interests and making it as persuasive as possible.
When giving a lender your financial details, be careful. If it rejects the short sale, it can try to foreclose on you using your provided financial information.
Who stands to gain from a short sale?
The buyer, seller, and lender have different experiences with short sales.
Seller: If you’re a seller, you should know that a short sale will probably harm your credit, although not as much as a foreclosure. However, if the homeowner can get the lender to report the debt to the credit bureaus as “payment completed,” a short sale is preferable to foreclosure. A short sale can prevent foreclosure and its damaging effects on your credit.
Buyer: The buyer receives the property for a lower cost, but it almost certainly requires work (think fixer-upper), and many red tapes are involved in getting the purchase done. A lender may demand that a buyer cover additional closing costs that the seller would typically bear.
Lender: The lender experiences a financial loss, although it may not be as significant as it would be if it were to foreclose on the property.
In a short sale, the revenues from the transaction are not enough to cover the seller’s expenditures of selling the home and the mortgage obligation. Everyone who is owed money must consent to accept less or maybe no money for this transaction to be finalized.
Are you a homeowner who’s planning to settle for a short sale? Do you need a guide or a professional agent to help you all the way? you can contact us for your mortgage needs.