When shopping for a home you will likely encounter a type of listing referred to as a short sale. At a base level, this is the type of sale in which the price of the home is less than the balance that is owed to the lender. This type of sale is often the result of the homeowner no longer being able to pay the loan as agreed. Instead of foreclosing on the home, the lender may agree to allow the sale of the home go through while taking a loss. Should the home not sell in a reasonable amount of time, foreclosure will likely be the next step.
How Do Short Sales Work?
Short sales are not for the purpose of attempting to sale a home that has declined in value. Instead, they are reserved for the case of financial hardship. Should foreclosure appear to be on the horizon, the bank may agree to proceed with a short sale. Prior to agreeing to this type of sale, the lender will require that the appropriate paperwork be filled out and submitted. Once this is reviewed, the lender will inform the homeowner of their decision. Should the lender agree, the property can then be listed as a short sale.
Once the house is listed, the current owner can accept purchase bids. These bids are often amounts that are lower than the current market value of the home and property. The borrower has the right to accept or reject any bids that are placed. After acceptance of a bid, the purchase proposal will then be sent to the lender where it will need to be reviewed. It is not the task of the lender to actually approve the sale. Instead, the lender will only acknowledge that the sale amount will be applied to the outstanding balance.
Consequences of a Short Sale
Borrowers should not expect to come out of a short sale with being negatively impacted in some manner. Though foreclosure is certainly worse, short sales carry their own set of consequences. These consequences may include the following:
- A decreased credit score, with a loss of 80-100 points
- A two year waiting period before being able to be approved for another mortgage
- Deficiency judgment is possible
- Possible tax consequences
Why Would A Bank Agree To A Short Sale?
Banks do not like foreclosures. Foreclosures become home inventory on which the bank may not be making any money. These properties also tie up cash, with as much as six times the value of the property needing to be held in reserve. In both the short and long term, it is simply in the best interest of the bank to not foreclose on the home. Even a sale that results in a loss will likely be much less expensive than the foreclosure process.
Short Sales for Home Buyers
Short sales can take quite some time to complete. The term "short" should certainly not be considered fast in this instance. The lender will need to approve the offer of the buyer, and may reject offers that are considered to be too low. Though the purchasing process may try your patience, these properties can be good deals. Consider working with a real estate agent who has plenty of experience with short sales in order to ensure a smoother buying process.
