The main goal when selling your home is to be able to pay back what you owe your lender on your mortgage. But what happens if the offer you receive will not cover the balance? Desperate times sometimes call for desperate measures and you decide to take the offer.
This is considered a “short sale”. You are “short” on paying back your lender, and you now need their approval to accept less than what’s owed on the loan.
Usually a short sale is a result of the homeowner facing financial troubles. On top of this, they could be having a hard time selling their home at a comparable price due to local Real Estate trends driving down their market value.
Foreclosure vs. short sale
While a short sale may not be the homeowners desired way of selling their home, it is far less drastic than a foreclosure. When the homeowner falls behind on their mortgage payments, the lender has the right to repossess the house and sell it. This is called a foreclosure.
After the lender sells the home, if there is still money owed on the loan, the homeowner may have some serious debt to repay. This, of course, depends on the state laws and how much is owed.
Due to the nature of a foreclosure, they tend to be less common than short sales. Undergoing a foreclosure will take a serious hit to your credit report, so it is wise to contact your lender to discuss your options first.
The benefits of a short sale
Here are four reasons why you should consider a short sale if in financial crisis:
- Your credit will take less of a hit, so, your chances of applying for a mortgage later down the road won’t be tainted.
- You still keep the right to sell your own home, keeping your dignity intact.
- A foreclosure forces the homeowner to vacate, but a short sale allows the homeowner to stay in their home during the sale.
- In a short sale, the lender will cover Real Estate agent commissions and closing costs.
The beginning of a short sale is just like any other home sale. You start by contacting a Real Estate agent and list your home as a short sale or “subject to lender”. The trickier part is once you accept an offer. Now you must get the approval from your lender.
Many lenders tend to prefer a foreclosure since this gives them ownership of the property and possible bail out funds from the homeowner’s mortgage insurance policy.
One thing to the homeowner’s advantage is that lenders tend to view owning and selling property as a hassle and may choose to avoid that route.
In order to have your short sale approved, you will need to submit paperwork to your lender. Include the offer in this paperwork as well as your “hardship letter”. This letter explains why you can no longer make your mortgage payments and need to part with your home. Usually this letter will include financial documents to back yourself up.
The approval process will likely include a home appraisal to make sure the offer you have received is fair.
If all goes well, the seller, buyer, and lender will hopefully walk away with not much lost.