Pros and Cons of a Short Sale

Home sales can get complicated, especially when the home in question can't be sold for enough to pay off the mortgage balance. A short sale could be the solution, as long as your lender agrees to the terms. 

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A short sale is a real estate transaction in which a house is sold for less than the existing mortgage balance. The main benefit of a short sale is that it can help you avoid foreclosure. Selling your home in a short sale typically doesn't impact your credit score as much as foreclosure or bankruptcy. 

When a home is sold in a short sale, the mortgage holder gets all the proceeds from the sale. The remaining amount is typically forgiven, though in some states the bank can require the seller to pay back the remaining mortgage amount over time. This is called a deficiency judgment. 

Short sales are more common during an economic downturn, especially when there are lots of homes on the market that were purchased at prices higher than the current housing market supports.

Why Would a Bank Agree to a Short Sale?

The main reason a bank or other mortgage holder would agree to a short sale is to avoid the process of foreclosure. Because foreclosure can be expensive and the bank often loses money, most financial institutions prefer to find other alternatives if possible. 

In some cases, a bank may not approve a short sale if the lending agent thinks a foreclosure would bring in more money. They also may not agree if they believe you have the income or assets to cover the actual mortgage payments.

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Who Is Eligible for Short Sales?

Eligibility for short sales is determined by the lending institution backing the mortgage. The first thing the bank needs to see to determine eligibility is your current financial status, so you may need to provide bank statements and employment information to show you're facing financial hardship that prevents regular mortgage payments.

In addition to income, the bank may look at assets to determine whether the mortgage holder is eligible for a short sale. If you have a lot of assets, such as money in bank accounts or other properties, the bank may not approve a short sale. 

The property itself must also be approved for a short sale. The lender typically hires an appraiser to determine the value of the home and assess comparable home prices in the area. If the bank thinks you can get the full remaining mortgage balance for the home, you might not get approved for a short sale.

What Is the Process of a Short Sale?

The first step in initiating a short sale is to talk to your lender. The short sale process is often initiated after the homeowner has missed one or more mortgage payments. You may have to submit a hardship letter detailing why you can't afford to pay the mortgage on the home.

Once your lender agrees to participate in the short sale process, you should consult with a real estate agent and an attorney experienced with this type of transaction. The details can be more complex than a regular real estate transaction.

Finding a buyer is the next step in the short sale process. As the homeowner, you're the one expected to find a buyer for the property. The lender handles the negotiations once a buyer makes an offer.

The sale is often contingent on bank approval, so it might take longer to process than a regular home sale. Sometimes, these sales fall through because the potential buyer finds another property while waiting on approval for a short sale. 

Are Short Sales Good for Home Buyers?

Short-sale homes can be a good investment, but there are some potential downsides. If you're thinking about purchasing a home in a short sale, consult a knowledgeable lawyer and real estate agent to help ensure everything goes smoothly.

Since the lender holding the original mortgage does the negotiating during the sale, homes in a short sale are typically sold as-is. You can't ask for repairs or changes to the property, but the seller does have a legal obligation to reveal any known defects before you sign the sale contract.

The National Association of Realtors offers specific certification for real estate agents who specialize in short sales and sales of foreclosed properties. An agent who has this type of certification may be able to identify potential issues and guide you through the process if you choose to buy a short-sale property.