A short sale in the real estate world occurs when a homeowner in poor financial standing decides to sell their property for less than its proposed value. The value is often less than the remaining amount on the mortgage. At Zumbly, we aim to provide real estate investors and home buyers with the tools to complete a property sale or purchase. Here’s our guide to the short sale.
How does a short sale situation arise?
A short sale situation arises when the homeowner is under a high degree of financial stress. This usually results from unemployment or decreased household wages, resulting in an inability to pay back a home loan. Other causes include medical expenditures, unwise spending, being a fraud victim, or any situation that renders them unable to pay back a loan.
In such a scenario, they may make an agreement with a bank to create a short sale in order to get the property off their hands.
How long does a short sale take?
Short sales are extremely time-consuming and long-winded processes. There are a lot of hoops to jump through when it comes to closing a short sale. It takes patience for the short sale to go through. Buyers have to wait weeks or months to hear back from the bank. Even then, uncertainty persists about the rejection or approval of the pending sale.
This red tape makes the entire process seem tiresome. Nevertheless, there are quite a few undeniable benefits for those who can no longer afford to pay their mortgage.
Benefits of a short sale
It protects credit
A short sale only happens when the seller is financially strapped. In such cases, their credit score tends to take a hit, which makes it all the more difficult to bounce back up. When it comes to a short sale, the effect on one’s credit score is more favorable than that of a foreclosure. The foreclosure process is often more lengthy and expensive for banks compared to the short sale process, which is why banks may be more likely to opt for the latter.
It protects from foreclosure
No homeowner wants to experience the possibility of a foreclosure. A lot of collateral damage may worsen the situation, even after the foreclosure occurs. This process leaves a permanent mark on homeowners’ credit history, which makes any sort of borrowing immensely difficult. Apart from causing personal loss and added stress, foreclosed houses negatively affect the housing market by bringing down the value of surrounding property.
It’s a great deal for buyers
From a buyer’s perspective, a short sale is an opportunity to acquire a house for a really low price. Many of the short sale properties require some TLC, which the current lenders cannot afford to pay for. A buyer who is willing to invest funds to put in some work often finds the cost to be significantly lower and the benefits to outweigh the risks.
The terms are more favorable
The name of the game in the real estate market is negotiation and timing. In the case of a short sale, banks find it much easier to let go of a property faster and recoup as much as they can rather than foreclose it and hold on to it as is. Foreclosure means that the bank has to pay for any repairs and maintenance until they find a buyer.
Here, the person buying a short sale property often finds the terms to be highly favorable in case of lower payments or easy financing options provided by the lender or bank.
Easy co-operation from the seller
Evictions aren’t easy by any means. When it comes to foreclosures, there are often high levels of resistance from the previous owners of the properties. Many tend to leave the house in a worse condition because they can. In such cases, the new lender or buyer has to put in extra money to make repairs to the property.
When it comes to a short sale, sellers are desperate to get rid of the property because they have no other option as a foreclosure would severely hurt their credit reports. The seller tends to be highly cooperative during the process, making it easier for all the parties involved.
What are the steps to a short sale?
For a process that’s fairly complicated, these steps help to make it easier.
Short Sale Decision
Before the entire process can begin, the borrower has to prove financial hardship by submitting a financial package to their lender. This package includes financial statements, a letter describing the seller’s hardship(s), and financial records, including tax returns, W-2s, payroll stubs and bank statements.
The goal of this step is to convince the bank that they’re no longer able to pay off the loan and make monthly mortgages. This step puts the process of a short sale into drive mode.
The next step in the short sale process comes after a seller accepts the offer put forth by a potential buyer. After this, the offer is sent to the lender by the listing agent in the form of a listing agreement along with various important documents. This may include a pre-approval letter of the buyer, the short sale financial package of the seller, and other documents. With this, the bank can start processing the sale. However, if the package is missing any documents, the process may be inadvertently delayed.
The whole processing period can last for months. The only results are either an approval or denial. Unlike regular purchase processings, banks have a lot of say in whether or not the deal will go through. Here, even if the seller accepts the offer made by a buyer, the bank is fully within its capacity to reject it.
It often does so on the calculation that there’s a possibility of the bank making more money if the listing undergoes foreclosure. If not, the bank will approve the short sale.
In summary, a short sale is a solution for homeowners under financial strain who are trying to avoid foreclosure. It can take a long time, but it provides a great deal for buyers and is often a better option than foreclosure or trying to hold on to the home with limited funds. If you are thinking about buying a new home after a short sale ensues, get started with the house hunting process at Zumbly.