Going through financial hardship is not an easy process — particularly when it pertains to your home. If you are falling behind on a mortgage you may have heard of selling your home as a “short sale.” But what is it, and how could it be an alternate route to bad credit.
Understanding the State of Financial Distress Today
How so? Because millions of homeowners face housing challenges every year due to unexpected financial hardship such as job loss, medical expenses, or economic downturns. For many, the threat of foreclosure is over their heads, imperiling not only their homes but also their financial futures.
What Is a Short Sale?
Just as it sounds, a short sale in real estate means selling your home for less than what you owe on the mortgage. When a seller is going short, they sell their house for whatever the market demands, forgoing payment of the remaining balance owed to the lender, if necessary. This sale requires the lender’s approval, and they may choose to either forgive the remaining debt or pursue that debt according to state law.
Purpose of This Guide
This article is intended to explain short sales to struggling homeowners. You’ll discover how they operate, their advantages and disadvantages and practical steps you can take to begin the process. By the end of this article you should have the information necessary to determine if a short sale is the solution for you.
What’s a Short Sale for a House in Real Estate?
Definition of a Short Sale
Short sale: This is when a homeowner sells their property for less than is owed on the mortgage. A short sale means that you owe more on your loan than you can sell your house for — for example, if you owe $300,000 on your loan but can only sell your house for $250,000. You should be aware that short sales need lenders approval, since the lender agrees to take less than they’re owed.
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Key Features of a Short Sale
Lender Approval Is Mandatory
You must also obtain your lender’s consent before proceeding with a short sale. They will assess your financial situation, and the home’s market value, to make a decision.
Proof of Financial Hardship
Homeowners must prove financial hardship — a job loss, divorce, surprise medical bills — to qualify for a short sale.
Discharge of Debt or Legal Action
The lender may forgive the difference between the sale price and the mortgage balance, depending on state laws and lender policies. There are times when they will continue to collect the balance due to them.
Short Sale vs. Foreclosure Comparison
| Aspect | Short Sale | Foreclosure |
| Initiated By | Homeowner | Lender |
| Impact on Credit | Less damaging (50–150 points drop) | Severe (200+ points drop) |
| Time to Recover | 2–3 years | 7 years or more |
| Control | Homeowner maintains some control | Lender takes full control |
Why Consider a Short Sale?
Avoiding Foreclosure
Foreclosure can destroy your credit score, and it may prevent you from qualifying for loans and housing in the future. Although a short sale does hurt your credit, it’s not as damaging, and you’ll escape the stigma and legal troubles of a foreclosure.
Financial Relief
If you feel as if you are drowning in debt, a short sale can provide an escape route. Selling your house helps free yourself from a mortgage that you just can’t handle.
Appeal to Buyers
Because short sales tend to be listed below market value, they often attract buyers who are searching for bargains. This can lead to faster offers than is customary for a traditional listing.
Short Sale Eligibility Requirements
Lender Requirements
Each lender has its own criteria for short sales eligibility. In general, you’ll need to provide documentation of your financial hardship, like:
Bank statements
- Proof of income, if you are not submitting with unemployment
- Medical bills or other documentation of unexpected expenses
Proof of Hardship
Sometimes financial hardship can come from common reasons like:
Loss of job or decreased income
- Divorce or separation
- High medical expenses
- Decline in home value
- Property Valuation
To be eligible, the market value of the property must be less than the mortgage balance. Lenders might require a professional appraisal or comparative market analysis (CMA) to verify precisely this.
What is the Short Sale Process?
Step-by-Step Guide
Evaluate your financial situation
Assess your income, expenses and debt and see if a short sale makes the most sense for you.
Contact Your Lender
Contact your lender to explain your financial hardship and ask to be approved for a short sale.
Hire Professionals
- An experienced short sale REALTOR® will successfully price your home and properly market to the real estate community.
- A legal or financial adviser can help you navigate tax implications and negotiations with lenders.”
Market Your Home
With your agent, have the property listed at a price that is attractive, based on current comparable market data for that area.
Negotiate Offers
After you receive offers, your agent and lender will collaborate to negotiate terms acceptable to all parties.
Close the Sale
And once you reach an agreement, fill out the paperwork and transfer the ownership to the buyer.
Pros and Cons of Short Sales
Pros
- Avoid Foreclosure: Is a better option for your credit than foreclosure.
- Debt cancellation: Some lenders may cancel the balance of the mortgage.
- Buyer Appeal: Typically sells under market value
Cons
- Long Process: It can take months to get approval.
- Deficiency Judgments: In certain states, lenders can go after the leftover balance.
- Emotional Toll: Moving on from your home can be hard.
Mistakes to Avoid in a Short Sale
- Skipping Professional Help: Deal only with experienced agents and lawyers.
- Taking Documentation Lightly: Be sure you have all your financial documents well sorted.
- Ignoring the Tax Implications: The debt you have forgiven may be taxable in some circumstances.
Short Sale vs Foreclosure: Which is Better?
Key Differences
- Credit Rating — Short sales are less damaging to your credit score.
- Control: Short sales give homeowners greater voice in the process.
Making the Right Choice
Your choice should be based on your financial circumstances, long-term goals and how urgently you need to fix your mortgage problems.
A Basic Guide for Preparing Your Home for a Short Sale
Declutter and stage: For buyers to be interested in your home, they most likely need to see themselves in it and not someone else.
- Price It Right: Collaborate with your agent to establish a competitive price.
- Gather Documentation: Everything lenders look for should be ready.
- [7] Legal and Financial Considerations of Short Sales
Debt Forgiveness
In some states, lenders may forgive the leftover balance; in others, they may file deficiency judgments.
Tax Consequences
Debt that is forgiven is sometimes treated as taxable income. Seek advice from a tax professional to learn what you need to do.
FAQs About Short Sales
What is a real estate short sale for a house?
A short sale is when a homeowner sells his or her property for less than the mortgage balance, with lender approval.
How is it different from foreclosure?
In a short sale, the homeowner starts the process and in foreclosure it’s the lender who does.
What are the risks involved?
- The risks include extended approval periods and possible tax consequences.
- How long after a short sale before you can buy another home?
- Yes, but depending on how much your credit recovers, you will probably not qualify for a new mortgage for at least 2–3 years.
Conclusion
Short sales can offer a lifeline to struggling homeowners seeking to avoid foreclosure and its long-term ramifications. By understanding the process, weighing the pros and cons, and seeking professional guidance, you can make an informed decision about whether a short sale is right for you.
If you’re contemplating a short sale, then reach out to qualified real estate professionals or financial advisors. So if you are looking for more information on short sales and getting your life back, Call us today!
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