What is a Short Sale?
Whether the cause is divorce, job loss, or another crisis, sometimes things go from bad to worse and you can’t make your mortgage payments. A short sale—selling your home for less than you owe—can be an exit strategy. How does a short sale work? Here’s what you need to know.
What is a short sale on a home?
A short sale home is sold for less than the balance on the mortgage. The lender agrees in advance to this. A portion of the mortgage is then paid with the proceeds. Your lender may then forgive the difference or require you to pay that remaining balance.
What to know about short sales
As a seller, you must provide your lender with proof of financial distress. You won’t be approved if you have the income or assets to finish paying what you owe.
Short sale vs. foreclosure
Homeowners in both scenarios face consequences, including hits to credit score and ability to get a mortgage. The short sale is not as damaging to your credit score as a foreclosure, which stays on your credit report for seven years. In a foreclosure you may also be required to wait up to seven years to buy another house, whereas with a short sale you can often get back into the market sooner. With a short sale, the homeowner finds a buyer, with foreclosure, the lender repossesses the house and puts it up for sale. A short sale can take months, a foreclosure happens more quickly.
The 7 steps in the short sale process
Going through the short sale process is nerve-wracking. Have a strategy for keeping sane.
Step 1: Consult with real estate agents and your lender
Provide documentation to your lender demonstrating your need for a short sale. Look for a real estate agent with the SFR designation (short sales and foreclosure resource) certification from the National Association of Realtors to help you.
Step 2: Get your property listed on the market
A real estate agent specializing in short sales will provide lists of short sales to buyers. List your home in your newspaper’s classifieds, real estate websites, and local real estate investor club. You’ll also need to get ready to show your home to potential buyers. Though you may not have the money to do major repairs, make your house presentable inside and out—declutter, repaint if needed, and deep clean. Remember that curb appeal counts too.
Step 3: Find a buyer
The onus is on you, the seller, to vet offers and find a buyer, preferably one preapproved to purchase a property in your price range.
Step 4: Submit the short-sale package to your lender
A short-sale package consists of documents that highlight your financial woes, and typically includes a W2, tax returns, and a hardship letter in which you explain your situation. Once you have an offer from a buyer in hand, the listing agent will send your lender the listing agreement, an executed purchase offer, the buyer’s pre-approval letter, a copy of the buyer’s earnest money check and your short-sale package.
Step 5: Your lender reviews and responds
Your lender is not obligated to approve the deal. It’s not unusual for a lender to reject an offer or to come back with a counteroffer if they think the buyer’s offer is too low. The best-case scenario is that the lender issues a short-sale approval letter and you can move forward with the deal.
Step 6: The buyer reviews and responds
If the lender throws a wrench in the process with a counteroffer, your buyer will need to respond. An agent typically negotiates with the lender on the buyer’s behalf.
Step 7: Close the sale
Once an agreement is reached that all can live with, your agent will get everything in writing. You’ll be set for closing day, when you can sign off on the paperwork and finally get that mortgage off your back.
Pros and cons of a short sale
A short sale might be your best way out of a bad financial situation, but you should consider your options carefully.
Benefits of a short sale for sellers
A short sale prevents foreclosure and wipes out most of your debt on the home. The lender might write off whatever debt remains. You can then re-enter the housing market and get a mortgage with an FHA loan, if you haven’t had late mortgage or installment payments in the year prior to the short sale, and no late payments in the year prior to applying for the new mortgage. The lender pays the real estate agent’s commissions.
Drawbacks of a short sale for sellers
Since the lender negotiates the home’s price and gets all proceeds, with a short sale you won’t walk away with any cash. The lender might also sue for the remaining mortgage balance. You’ll also have to put in the sweat equity of prepping your house for sale and finding a buyer. If you don’t find one that the lender approves, you could face foreclosure.
Benefits of a short sale for buyers
Buyers can get a great price. The competition isn’t stiff, increasing the probability their offer will look good to the lender.
Drawbacks of a short sale for buyers
A short sale takes longer than a traditional sale, especially if there are several lienholders. A buyer can expect a big to-do list, like researching the value of the home and determining its condition. The house they purchase may need repairs.
Mistakes to avoid in the short sale process
Even when the deal is a short sale, the buyer shouldn’t skip the home inspection. A cash strapped homeowner may not have maintained the property. They also shouldn’t skimp on research, to find out if the house is in a flood zone or had illegal renovations, for example. Sellers must be mindful of pricing: If it’s too high it will scare off potential buyers, and if it’s too low the bank might balk. Do your research of comparable sales so you’re in the ballpark. This is one time not to DIY, get the help of a real estate agent with short sale experience to negotiate the deal.
Alternatives to short sales
Talk to your lender about a revised payment plan or a loan modification. If you have private mortgage insurance, check to see if the insurer will advance funds to your lender to settle arrears.
You might also consider selling for cash through a marketplace like Sundae. With Sundae, you don’t have to do any of the work of preparing for the sale, since you’ll be selling as-is. And you’ll be able to quickly compare offers to get the best possible cash price, and then put that money toward your loan.
How to evaluate if a short sale is a good idea for you
Be sure you’ve looked at other alternatives to a short sale. If you can live with the fact that the process may be drawn out, that your credit score will take a hit (though not as bad as the one you’d see in foreclosure) and that you may still have to pay a portion of the mortgage to the lender, then proceed.
Frequently asked questions
How long does a short sale take?
It could be a few weeks, but more likely several months.
How often do banks accept short sale offers?
It varies. Many lenders prefer a less-risky short sale over a foreclosure, but if they believe they can make more money by doing a foreclosure, they might not accept the short sale proposal.
Can you get a mortgage loan after a short sale?
Yes, if you meet certain conditions. You can get a mortgage with an FHA loan if you haven’t had late mortgage or installment payments in the year prior to the short sale, and no late payments in the year prior to applying for the new mortgage.
Why do short sales fall through?
Short sale in real estate can go awry for many reasons: The buyer might decide the process is taking too long and walk away, or the bank might feel the price is too low.
What are the requirements for a short sale?
The home must be worth less than what is owed on it. As the seller, you must document your financial hardship. The lender has to agree to the short sale in advance.
Do you have to pay taxes on a short sale?
If your lender forgives any remaining debt after the short sale, that may be taxable as income for you. There are exceptions, however. It’s smart to discuss your potential tax liability with an accountant or tax attorney.