What Is a Short Sale? A short sale is a real estate transaction in which the proceeds from the sale of a property fall short of the amount the borrower still owes on the mortgage. When the borrower is unable to keep up with the mortgage payments and the home's value has dropped below the outstanding loan balance, a short sale may be an option instead of foreclosure. If the borrower is unable to pay off their mortgage in full, the lender may agree to take a lesser amount in exchange for the deed. The borrower may go into foreclosure if they have fallen behind on their mortgage interest and the property's value has dropped below the outstanding loan balance. Strategic default occurs when a borrower voluntarily stops paying mortgage payments while being able to keep up with them.

Reasons For Short Sale

There are several reasons why a borrower may opt for a short sale. One of the most common reasons is financial hardship. This can include job loss, medical expenses, or other unexpected expenses that make it difficult for borrowers to continue making mortgage payments. Additionally, suppose the property's value has decreased. In that case, the borrower may owe more on the mortgage than the property is worth, making it difficult to sell the property for enough to pay off the mortgage. Another reason why a borrower may opt for a short sale is strategic default. This is when the borrower decides to stop making mortgage payments even though they have the financial means to do so. They may do this because they believe the property is worth less than the amount they owe on the mortgage, and they would rather have the lender take the property back rather than continue making payments on an underwater mortgage.

Process Of Short Sale

The process of a short sale begins with the borrower contacting their lender and requesting that they be considered for a short sale. The lender will then review the borrower's financial situation and determine if they qualify for a short sale. If the borrower does qualify, the lender will then work with the borrower to list the property for sale and find a buyer. The lender will also work with the borrower to determine the minimum amount they will accept as payment in full on loan. Once a buyer is found, the lender will review the offer and determine if it is acceptable. If the offer is accepted, the lender will approve the short sale, and the transaction will proceed as a normal real estate transaction. The proceeds from the sale of the property will be used to pay off the mortgage, and any remaining funds will go to the borrower. However, if the lender does not approve the short sale, the borrower will have to continue making payments on the mortgage or risk foreclosure. In some cases, the lender may also approve a short sale with a deficiency judgment, meaning the borrower will still be liable for the remaining debt after the short sale process.

Impact On Credit Score

A short sale can harm a borrower's credit score. This is because the short sale is reported to the credit bureaus as a loan settled for less than the full amount. This will harm the borrower's credit score, and it will take time for the borrower's credit score to recover. A borrower's credit score may take a hit, but a short sale is typically seen as less detrimental than a foreclosure. This is because a foreclosure is reported to the credit bureaus as a loan that was not paid in full, which has a more significant negative impact on a borrower's credit score.

Alternatives To Short Sale

A borrower does not have to resort to a short sale since many other options are open to them. One of the potential solutions is reworking the terms of the loan. A loan modification is what happens when a lender agrees to change the terms of a loan to lower the monthly mortgage payments that a borrower has to make. This helps the borrower stay afloat financially. This can include bringing down the interest rate, extending the duration of the loan term, or delaying the initial payment. Another option that could be considered is submitting a deed instead of foreclosure on the property.

Conclusion

A short sale is a transaction in real estate when the proceeds from the sale of a property are less than the outstanding mortgage debt. This is a strategy for avoiding foreclosure when the borrower is behind on mortgage payments due to a decline in the property's value. Short sales happen when the homeowner and the lender negotiate a sales price that is lower than the outstanding mortgage balance. Before proceeding with a short sale, borrowers should carefully consider the potential impact on their credit score.