Home Sellers What is a Short Sale?
What is a Short Sale?
A short sale, or pre-foreclosure sale, is when you sell your home for less than the balance remaining on your mortgage. This often happens when the house has declined in value and is worth less than the current mortgage. A short sale is an option for those struggling to sell or who are late on their monthly payments. Let's learn more about short sales and how to go about having one.
What Happens in a Short Sale?
Before a short sale process begins, the mortgage lender must approve it through documentation claiming why it's necessary. In most short sales, the lender will lose out on money because they are agreeing to sell the home for less than what is owed to them through mortgage payments.
Once approved, the process is similar to a standard home transaction. The homeowner will work with an agent to list, market, and sell their home. The difference between the home's value and the remaining mortgage balance is called the deficiency. Depending on the situation, the homeowner may be required to make a financial contribution toward that balance. However, once the sale is complete, the owner will be relieved of any further financial responsibility, also known as a deficiency waiver.
Reasons For a Short Sale
The most common reasons homeowners have a short sale include:
- Inability to refinance or modify your mortgage
- Long-term hardship
- Behind on mortgage payments
- Unable to sell your home at a price that covers what you owe on your mortgage
- Can no longer afford your home and need to move
- Owing more on your home than what it's worth
Short Sale vs. Foreclosure
Many people use foreclosure and short sale synonymously, but they are different. In the case of a foreclosure, the lender seizes the home after the owner fails to make payments. Thus, the owner cannot initiate a foreclosure, unlike in the case of a short sale. For most foreclosures, the process takes place after the homeowners abandon the property; if not, they are evicted by the lender. The process for a short sale is also much longer than a foreclosure; it can take up to six months to be approved for a short sale.
Benefits of a Short Sale
The most significant benefit of a short sale is that it’s not as detrimental to the owner's credit score as a foreclosure. It will still ding your credit score, but not as much as a foreclosure. Other benefits include:
- Eliminating your remaining mortgage debt
- Receiving relocation assistance (in specific instances) up to $3000
- The ability to repair your credit sooner than if you went through a foreclosure
- The ability to secure a mortgage sooner, since foreclosures can delay the ability for up to 7 years.
How to Apply for a Short Sale
- Contact your mortgage lender to find out if you're eligible for a short sale. Supply the necessary documents, such as mortgage statements, pay stubs, and income tax returns.
- Outline your current situation in a hardship letter as to why a short sale is necessary. Let them know you are trying to avoid foreclosure.
- Contact a real estate agent to sell your home as a short sale.
Though short sales can hurt your credit, they are a much better option than foreclosure in dire circumstances. If you feel you are at future risk of foreclosure, act fast to secure the possibility of a short sale. In need of an agent to help sell your home? Contact HomeHunt today!