What Is a Short Sale?
With foreclosure rates in the U.S. at record highs and more home loans slipping into default every day, you've probably heard about various foreclosure-related real estate maneuvers in the news or from friends.
Here's the information you need to understand the short sale – what it is, how it works, and whether it may benefit you.
Short Sales in the Foreclosure Process
When a homeowner is struggling with payments and realizes he or she can't keep up with the mortgage, three things could happen:
- The owner finds a way to catch up on mortgage payments and avoid foreclosure.
- The owner sells his/her home before the lender forecloses on it.
- The owner lets the bank foreclose on the home.
Because most people cannot afford the first option (which is why they're struggling in the first place), some opt for the second. Selling a property for less than what the current owner owes the lender is known as a short sale.
The Benefits of a Short Sale
Before you can sell your home in a short sale, your lender must agree to accept less than the amount you owe. But in many cases, lenders are willing to do so. Why? Foreclosure proceedings can eat up lots of time and money.
To foreclose on a home, lenders must manage the property (while nobody is living there) and arrange an auction – all while receiving no payments on their loans! In some cases, lenders even pay an outside contractor to take care of these tasks, meaning they lose even more money.
By avoiding foreclosure, then, the parties involved can save themselves time, money and hassle:
- Banks/Lenders: save money by eliminating the nonperforming loan, refraining from paying someone to manage the property and not arranging an auction.
- Sellers (Current Homeowners): save themselves from having a foreclosure on their credit report. While a foreclosure and a short sale have a similar initial impact on credit scores, foreclosures prohibit borrowers from getting a Fannie Mae-insured loan for up to five years. Short sales only cause this prohibition for 24 months.
- Buyers: can potentially get a house for less than its market value. Beware, though, if you're considering buying a short sale property: do research beforehand to make sure you're getting a good deal.
Drawbacks of a Short Sale
While short sales can be beneficial to the parties involved, not all short sales are good deals for those looking to buy real estate. Many short sales are "as is," meaning that any needed repairs or improvements must be financed by the buyer.
In addition, short sales can take a long time to close, particularly if the previous owner had more than one mortgage or lender. And even if the seller accepts your offer, the lender may want a higher price.
As always, be sure to explore all your options before signing any papers.
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