Short Sale – Everything You Need to Know

I’ve Heard People Talk about a Short Sale… What is that?!

A short sale is when a home is sold for less than what is currently owed to the lender.

Why Would the Lender Allow That?

If the homeowner cannot continue to make payments on the house, eventually the lender will foreclose on the home. That means that the lender will repossess the home, which no lender wants to do. A Short Sale benefits the lender by allowing it to avoid repossessing the home, and benefits the homeowner by avoiding a major hit to their credit that comes along with foreclosure.

Keep in mind as well that the majority of home loans are amortized. This means that the interest payments are front-loaded, or paid up front, and not in equal amounts throughout the duration of the loan. For a basic example, in year one of the loan, the monthly payments may be 5% principal, 95% interest. In year 30 of the loan, they may be 95% principal, 5% interest. The significance of this is that the bank makes the majority of its money in the beginning of a loan, and therefore in a Short Sale situation, there is a good chance the bank is not ‘losing’ as much money as it may seem.

Who Can Pursue a Short Sale?

A short sale is an option that is sometimes available to homeowners who are behind on payments and are distressed borrowers. They have a home that is underwater, meaning the home is worth less than the current balance on the mortgage.

How Does a Short Sale Work?

Short sales are usually initiated by the homeowner, or an owner’s Real Estate Agent may recommend a Short Sale as an option. Short Sales occur most frequently in depreciating markets, or when the market in general has depreciated (the Great Recession of ‘08 is a great example). However, there are a variety of circumstances that can necessitate a Short Sale.

To even begin the Short Sale process, the lender who holds the note must agree to the decision. The lender will need documentation as to why a short sale is needed.

A homeowner may list the house for sale with or without a Short Sale approved by the bank. The buyer and seller negotiate as standard, and upon the seller accepting an offer, the seller will then seek lender approval at the negotiated price. It is important to note that no short sale may occur without lender approval. For lender approval, a Short Sale package must be submitted. This is a package of financial information, including financial statements and records, and a letter describing the seller’s hardship.

Once a buyer’s offer on the house is accepted, a Short Sale offer must be submitted to the lender. This includes the Listing Agreement, the Purchase Offer, the buyer’s Preapproval letter, and a receipt of the Buyer’s Earnest Money Deposit.

Upon receipt of the packages, the bank then reviews the offer. They will either approve or deny the Short Sale, which can take several weeks to months.

Short sales tend to be very lengthy, potentially taking up to a year to process. They are also very paperwork-intensive transactions. It is highly recommended that a homeowner pursuing a Short Sale works with a professional Short Sale Negotiator. This person will handle the paperwork, and would have an inside track in understanding what the bank is looking for, and who the decision makers are.

So What Should I Do?

If you are falling behind on payments, the most important thing to do is to address the situation IMMEDIATELY. As Real Estate Consulants, we have a variety of resources and referrals to help with your situation, including, but not limited to:

-Connect you with a lender who could potentially help refinance or renegotiate the terms of your loan so that you can remain in your home.

-Provide you with a cash offer if you wish to sell and move on.

-Connect you with a Short Sale Negotiator to begin the Short Sale process, and avoid foreclosure.