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Where things get complicated is in relationship between the home-owner and the lender. That negotiation can take several different shapes and yield very different results. If you find yourself in the position of a short sale we have created some best practices to follow to maximize your upside.
What Does A Short Sale Mean?
A short sale quite literally means: “Selling A Home For Less Than What Is Owed“.
This happens when the sale price of your home is not enough to cover your outstanding mortgage balance. To avoid foreclosure, your lender may agree to accept a lower amount resulting in a short sale. While it can be complicated and take time, a short sale can be a good option if you’re struggling to keep up with mortgage payments.
What Does A Short Sale Mean?
Where things get complicated is in relationship between the home-owner and the lender. That negotiation can take several different shapes and yield very different results. If you find yourself in the position of a short sale we have created some best practices to follow to maximize your upside.
- Financial Hardship – A short sale typically starts when a homeowner is facing financial hardship and is unable to keep up with mortgage payments.
- Qualification – The lender will then review the homeowner’s financial situation. From the review process they were determine if they are going to approve the short sale request.
- Listing – Once the lender approves the short sale, the homeowner can then list the property for sale, and potential buyers can submit offers.
- Final Offers – The lender will review and approve the final offer that the homeowner is most interested in. If accepted, the sale can proceed to closing.
Where things get complicated is in relationship between the home-owner and the lender. That negotiation can take several different shapes and yield very different results. If you find yourself in the position of a short sale we have created some best practices to follow to maximize your upside.
Best Practices During The Process
If you are in the situation to go through the short sale process here are absolute best practices to follow.
- Presentation: Contacting your mortgage lender and explaining your financial situation and your desire to pursue a short sale.
- Determine Eligibility: Verify if you are eligible for a short sale by contacting your mortgage lender and discussing your financial situation.
- Gather Documentation: Prepare a hardship letter and collect financial documentation to demonstrate to your mortgage lender the reasons for your inability to continue making mortgage payments.
- Hire: Work with an experienced real estate agent or short sale specialist who is knowledgeable about the short sale process and can guide you through the process.
- Listing: Listing the property for sale and finding a buyer who is willing to purchase the home for less than the amount owed on the mortgage.
- Offer: Submitting an offer to your lender, which will include a detailed financial statement, a hardship letter explaining why you are unable to continue making mortgage payments, and the offer from the buyer.
- Negotiate: Work with your real estate professional to negotiate the terms of the short sale with your mortgage lender. This includes the sale price of the property and the amount that will be forgiven by the lender.
- Find A Buyer: Find a buyer who is willing to purchase the property and who is able to close the deal within the agreed-upon timeframe.
- Wait Patiently: Waiting for the lender to review and approve the offer, which can take several weeks or even months.
- Close The Sale: Close the sale of the property and ensure that all parties have fulfilled their obligations.
- Release Of The Mortgage: Once the sale is complete, the mortgage lender should release the mortgage, allowing the homeowner to move on from their financial difficulties.
Note: The first and second items are duplicates, but we included both to make sure the steps were comprehensive.
Recommendation: We recommend that if you are going through this process that you work closely with your lender and a real estate professional. This will help ensure that all necessary documentation is submitted and that the process goes as smoothly as possible.
– Rise Buys Fast
It Isn’t Always A Bad Thing.
Believe it or not, a short sale can be a beneficial solution for homeowners who are struggling to keep up with their mortgage payments. A short sale can not only help the seller get out of some troubling situations but also offer several benefits for the lender and the buyer.
So there are some benefits?
You got it, it’s not all bad! When selling a mortgaged house through a short sale, homeowners have the opportunity to avoid the harsh consequences of a foreclosure. Some of the main consequences a home owner could avoid are a substantial decrease in credit score and loss of equity. Additionally, it is also a way for homeowners to sell their property without having to pay out of pocket to make up for the shortfall in the mortgage balance. However, the mortgage lender must agree to the short sale, and the homeowner must demonstrate hardship in order to qualify for this option.
Not only are there benefits for the seller, there are benefits for all the parties involved: the seller, the buyer and the mortgage company. So in theory, a short sale can create a desirable situation for all the parties involved!
Benefits to the seller.
- Avoiding foreclosure: A short sale allows the seller to avoid the negative consequences of a foreclosure. Allows them to avoid damage to credit score, difficulty obtaining credit in the future, and potential deficiency judgment.
- Debt forgiveness: In some cases, the lender may agree to forgive any remaining debt after the short sale is completed. This relieves the seller of further financial obligations.
- Control over the sale: Unlike in a foreclosure, the seller has more control over the sale process. They can work with their real estate agent to market the property and negotiate with potential buyers. This allows the seller to ensure the best possible outcome.
Benefits to the mortgage company.
The mortgage company has a steak in a positive outcome! Their fund of money is managed and scrutinized for risk. If there is an opportunity to avoid added costs and risk, they will likely consider the option.
- Costs: Creditors prefer a short sale to avoid the costs and time associated with the foreclosure process.
- Loss Ratio: Reducing the lender’s losses by recovering some of the outstanding loan balance helps them recoup liquidity.
- Credit: Minimizing the negative impact on the lender’s credit portfolio allows them to better manage their overall fund.
- Maintenance Costs: Lenders prefer to avoid the costs of maintaining and managing a foreclosed property. This can consume more capitol.
- Legal Fees: Reducing the potential for legal challenges from the homeowner or other parties.
Benefits to the buyer.
As a real estate investor, a short sale property can be a great score! This is because the home is almost always priced under the market value. When an investor buys a short sale, they typically have realized profits right away!
- A Discounted Price: Short sale homes are often priced below market value. This offers the buyers an opportunity to purchase a property at a lower price.
- Built-in Equity: In some cases, a short sale property may already have built-in equity. This allows the buyer to potentially realize a profit upon resale.
- Quick Closing: Short sale homes can often close more quickly than a traditional sale. This is because the seller and lender are motivated to complete the sale as soon as possible.
A short sale can be a beneficial solution for both the homeowner and the lender. This is primary the case in situations where the homeowner is unable to keep up with their mortgage payments. As we know now, if the seller cannot keep up with their mortgage payments, they are headed for foreclosure.
Yes, to this point we have taken the time to highlight some of the benefits about the short sale. That said, we should mention that a short sale is typically not in the BEST interest of everyone involved.
A Short Sale Is Still… Typically Not Great.
It should go without saying, the negatives of a short sale typically out-weigh the positives. The transaction can impact a seller in a wide range of ways.
- Damage to Credit Score: A short sale can negatively impact a seller’s credit score. This potentially makes it difficult for them to obtain credit or loans in the future.
- Tax Implications: The transaction may result in taxable income for the seller, which could lead to additional financial burdens. This typically depends on the sellers financial situation and the specifics of the deal.
- Loss of Equity: The seller may be required to forfeit some or all of their equity in the property. This is because the sale price of the home is typically lower than the outstanding mortgage balance.
- Potential Deficiency Judgment: In some cases, the mortgage lender may seek a deficiency judgment against the seller. This is to allow the lender to recoup the remaining balance owed on the mortgage. The can result in legal and financial consequences for the seller.
- Negative Impact on Future Home Buying: A short sale may limit their options for obtaining financing and can negatively impact their credit score. This can impact sellers ability to buy a home in the future.
Check out the pros and cons of a short sale!
The Alternatives.
Ok, so there are positives and negatives of the process, no surprise. But, there are alternatives to a short sale if you find yourself in that situation. We recommend considering all your options as there can be a wide range of consequences to be aware of.
- Loan Modification.
- Refinancing.
- Cash out with a cash offer.
- Bankruptcy.
- Selling the home for its full value.
Loan Modification
To make mortgage payments more affordable, homeowners can seek a loan modification that changes the terms of their existing mortgage. A mortgage professional works with the homeowner’s lender to adjust the interest rate, payment period, or other aspects of the loan. This can help the homeowner avoid foreclosure and stay in their home.
Refinancing
Homeowners may opt to refinance their mortgage to secure more favorable terms, such as lower interest rates or longer repayment periods. This involves replacing the existing mortgage with a new one. Refinancing can be an excellent option for those who can qualify for a new mortgage and want to lower their monthly payments or reduce their overall interest expense.
Cash Out With A Cash Offer
For homeowners who need a quick resolution to their financial difficulties, there are individual investors and companies that will make a fair market offer for their home. Working with these buyers can provide a cash payout to the homeowner and help them avoid foreclosure or bankruptcy.
Want to know what a cash offer looks like for your home?
Bankruptcy
Filing for bankruptcy can provide temporary relief from foreclosure proceedings and give the homeowner time to reorganize their finances. Bankruptcy can also help homeowners discharge certain debts, but it is not a long-term solution. Homeowners should consult with an attorney before pursuing bankruptcy as an option.
Sell For Full Value
If a property has enough equity, it may be possible for a homeowner to sell it for its full value and use the proceeds to pay off the mortgage. This can be a viable option for homeowners who have built up equity in their home over time and want to avoid the negative consequences of foreclosure or bankruptcy.
Note From Author: Did you know that there are actually 41 ways to sell a home?! Here is our article expanding on each of the various ways a home owner can sell.
41 Ways To Sell Your Home
Each alternative may have different advantages and disadvantages therefore it’s important for homeowners to explore all their options before deciding on a short sale. Each financial situation is unique meaning each option might not be the same for everyone.
Ok, so maybe a short sale is the move for you. Did you know that there are actual several different types of short sales? If you are going through the process of selling keep reading; in this next section we break apart each of the different types of short sales.
Other Types Of Short Sales.
There are actually several different types of short sales and it would be wise to learn more about all the other alternatives. There are 4 other types of short sales that have some differences from the traditional short sale.
- Government-Assisted Short Sale.
- Deed-In-Lieu of Foreclosure.
- Short Sale Auction.
- Pre-Foreclosure Short Sale.
Each of these can typically get confused with a traditional short sale, however, each have major differences.
Government-Assisted Short Sale.
A government-assisted short sale is different from a typical short sale in that it involves the participation of a government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). In a government-assisted short sale, the government agency works with the mortgage lender and the homeowner to help facilitate the sale of the property, often with the goal of avoiding foreclosure. The government agency may provide financial assistance to the homeowner or offer incentives to the mortgage lender to agree to the short sale. Additionally, government-assisted short sales may have different eligibility requirements and guidelines compared to typical short sales.
How is a government-assisted short sale different from a traditional short sale?
Government-assisted short sale:
- Involves government programs and agencies, such as the Home Affordable Foreclosure Alternatives (HAFA) program and the Federal Housing Administration (FHA).
- Offers additional financial incentives and assistance to homeowners (who qualify).
- Standardized processes and guidelines to help streamline the short sale process.
- The homeowner might need to meet certain eligibility criteria or provide additional documentation.
- Specific timeframes and deadlines for completing the sale.
Typical short sale:
- No involvement from government programs or agencies.
- No additional financial incentives or assistance beyond what the lender is willing to provide.
- More variable processes and guidelines depending on the lender and the homeowner’s specific circumstances.
- Subject to more negotiation and back-and-forth between the homeowner and lender.
- Subject to longer processing times and less certainty in terms of outcome.
Deed-In-Lieu of Foreclosure.
A deed-in-lieu of foreclosure and a traditional short sale are two options available to homeowners who are struggling to keep up with their mortgage payments. While both options are alternatives to foreclosure, there are some significant differences between them.
So how is a deed-in-lieu of foreclosure different from a traditional short sale?
Deed-In-Lieu Of Foreclosure
- In a deed-in-lieu of foreclosure, the homeowner voluntarily transfers ownership of the property to the mortgage lender in exchange for the lender releasing them from their mortgage obligation.
- This option may be more suitable for homeowners who are unable to sell their property through a short sale or who want to avoid the potential negative impact of a short sale on their credit score.
- However, homeowners who opt for a deed-in-lieu of foreclosure may still face tax consequences and may not be eligible for relocation assistance.
Traditional Short Sale
- In a traditional short sale, the homeowner sells the property for less than the amount owed on the mortgage, and the mortgage lender agrees to accept the sale proceeds as full payment of the debt.
- This option can be a better choice for homeowners who want to avoid foreclosure but have been unable to keep up with their mortgage payments.
- However, short sales can be a more complicated and time-consuming process than a deed-in-lieu of foreclosure, and the homeowner may still face tax consequences and damage to their credit score.
Short Sale Auction.
In a short sale auction, the property is sold to the highest bidder through a public auction. On the other hand, in a traditional short sale, the homeowner finds a buyer willing to purchase the property for less than the amount owed on the mortgage in collaboration with the lender.
The timing of a short sale auction is usually a few weeks to a few months after the auction date, while a traditional short sale process takes several months to complete. The sale price in a short sale auction is determined by the highest bidder, while in a traditional short sale, it’s negotiated by the homeowner, lender, and potential buyer.
In a short sale auction, the homeowner has less control over the sale process and final price than in a traditional short sale, where they can negotiate and choose the best buyer for their property.
So how is a short sale auction different from a traditional short sale?
Short Sale Auction
- Property is sold through a public auction
- Bidders compete to buy the property
- Sale occurs within a short time frame
- Sale is typically final and non-negotiable
- Seller may not have as much control over the sale process
Traditional Short Sale
- Property is marketed to potential buyers
- Negotiations occur between the seller, buyer, and lender
- Sale can take longer to complete
- Terms of the sale are typically negotiable
- Seller has more control over the sale process
Pre-Foreclosure Short Sale.
I should note here that a ‘traditional’ short sale and a pre-foreclosure short sale are often referred to as the same thing. However, the status of the homeowner in the eyes of the lender are the main variable here. A pre-foreclosure short sale is a type of short sale that occurs when the homeowner has fallen behind on mortgage payments and is in danger of foreclosure. In this case, the homeowner initiates the short sale process before the lender has officially started the foreclosure process.
A traditional short sale, on the other hand, can occur at any time during the life of the mortgage when the homeowner owes more on the mortgage than the home is worth. In this case, the homeowner works with the lender to sell the property for less than the outstanding balance on the mortgage.
The main difference between a pre-foreclosure short sale and a traditional short sale is the timeline. A pre-foreclosure short sale is initiated before the lender has started foreclosure proceedings, while a traditional short sale can occur at any time during the life of the mortgage. Additionally, a pre-foreclosure short sale may involve more urgency and pressure on the homeowner to sell quickly in order to avoid foreclosure.
So how is a pre-foreclosure short sale different from a traditional short sale?
Pre-Foreclosure Short Sale
- The seller is behind on mortgage payments and facing foreclosure
- The lender initiates the short sale process before the foreclosure is complete
- The lender is often more motivated to approve a short sale to avoid the costly foreclosure process
- The seller may have less time to negotiate and close the sale due to the impending foreclosure
Traditional Short Sale
- The seller may or may not be behind on mortgage payments
- The seller initiates the short sale process
- The lender may be less motivated to approve a short sale, as foreclosure is not imminent
- The seller may have more time to negotiate and close the sale without the pressure of a pending foreclosure.
Last Thoughts.
Selling a home through a short sale can be a complex process but it can also provide homeowners with an alternative option to avoid the consequences of a foreclosure. It is best to work with experienced professionals such as realtors or short sale specialists to ensure a successful outcome. If you have any questions or need further assistance, feel free to reach out for a free consultation.
We invite comments, questions and criticism! You you have anything to ask or share drop us a line and we wish you luck!
