Featured News 2018 What Is a Short Sale?

What Is a Short Sale?

When home values drop and people can't afford their mortgage payments, initiating a short sale is one way to avoid foreclosure and make good on the mortgage.

Put simply, a short sale is when a homeowner sells their home at or below appraised value in return for a mortgage lender to consider loan paid in full (as the selling price is often less than the couple owes on the home). Short sales are a powerful financial tool for people whose mortgages are "underwater," or when homeowners owe the bank more than the home is worth.

Here's how it works:

Say a homeowner buys a house for $500,000. Two years later, they owe $480,000 on the mortgage—but the housing market crashes and now their home is only worth $420,000.

Rather than pay into a home that's no longer worth the price, they make a deal with their bank to do a short sale. In essence, the couple will sell their home for its appraised value or lower ($420,000), which will go toward paying off the mortgage. Despite losing $60,000, the bank agrees to consider the mortgage paid in full when they receive the proceeds of the short sale.

Why Would a Bank Agree to a Short Sale?

Short sales are initiated by debtors, allow them to work out a solution with the bank, do not require the bank to litigate against the homeowner, and result in a home that's in better condition. It costs less energy, time, and money—all of which makes it a good move for the bank. What they might lose in a few mortgage payments, they get back in the certainty that comes from a lump sum cash payment.

Foreclosures are time-consuming and financially prohibitive. Banks and homeowners are forced into adversarial roles, requiring a real estate litigator. Because foreclosures tend to require either the sale of an abandoned home or the eviction of a resident, foreclosed homes tend to be in poorer condition than surrounding houses. In many cases, banks have to invest in re-appraisal and repair in order to bring the home back into sellable condition.

Foreclosures also bring down the value of a surrounding neighborhood. In a precipitous housing market, foreclosing on a home could lead to a disastrous domino effect, leaving entire neighborhoods with lower home values and forcing families in tight circumstances to foreclose as well.

Foreclosures also open up banks to litigation, as homeowners have the opportunity to file injunctions and restraining orders against the bank.

In short, banks want to avoid foreclosure.

Short Sales Are the Proactive Version of Foreclosures

Foreclosures happen to you. Short sales are under your control—you sell the home, you set the terms, you decide how it proceeds. This sort of control results in homeowners being empowered and financially wise.

Your creditors will agree: short sales result in far fewer credit penalties than a foreclosure does. Not only that, but you'll be able to apply for a new mortgage immediately after a short sale, which isn't the case with foreclosure.

If you're behind on your mortgage payments, it might be time to call a real estate attorney—one free consultation could determine if a short sale is the right move for you.

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