A short sale in real estate allows a struggling homeowner to submit a proposal to their lender to sell their home for less than the remaining balance of the mortgage. During the Great Recession of 2008, short sales became popular as many homeowners went underwater in their homes.
What is a short sale in real estate?
A short sale occurs when a homeowner in financial trouble sells their home for less than they owe on the mortgage. Instead of waiting for the bank to foreclose on the home, the homeowner initiates the short sale process by submitting an application to the lender.
Short sales are a safer alternative to foreclosures for both sellers and their lenders. That is why you often can find them priced just below market value.
The lender will get all the proceeds of the sale, and then have 2 options: either forgives the difference or gets a deficiency judgment, which requires the original borrower to pay what’s left over.
When a homeowner is eligible to ask for a short sale?
For a bank to agree to a short sale, the homeowner must establish:
- They face a financial hardship that prevents them from meeting their loan obligations, AND
- They don’t have enough income and assets to pay off the loan. It can be cash, other real estate, available credit, investments, and virtually any other thing of value the homeowner can use to pay the loan.
- The property is worth less than the amount of the loan. The seller or a specialized real estate agent (SFR®) has to run an accurate Comparative Market Analysis or a Broker Price Opinion.
Advantages and differences with a foreclosure
- The short sale in real estate is a much quicker process. A foreclosure is a legal action taken by a lender to seize a seller’s property after they fall too far behind on their monthly payments.
- Fee savings: Normally, the seller bears the burden of closing costs and real estate agent commissions. In a short sale, however, the lender will pay those fees and commissions.
- Both processes can negatively impact a seller’s credit score (a short sale could knock as many as 160 points off). In a foreclosure though, you can have a far more damaging impact on a seller’s FICO®.
- Short sale is a private process (lender/seller) as a foreclosure involves the Court and is public.
Get prepared for the short sale
If you are a homeowner facing a foreclosure, it is important that you work with a knowledgeable agent who will protect your best interests. A Short Sale and Foreclosure Resource Certified Agent (SFR®) are better qualified to handle these situations b. They are also experienced to deal et negotiate with lenders and banks.