Short Sale 101

 A Short Sale is typically requested and initiated by a homeowner who is unable to make their mortgage payments for 2 or more periods, and where a loan restructuring is not possible. A short sale is an "arrangement" between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. In many cases, the lender forgives the remaining debt and accepts a mortgage payoff that doesn't cover the outstanding loan. This option is in place to help homeowners and banks, when foreclosure or bankruptcy is the other alternative.

For a lender, a short sale can be appealing because the process can be shorter and less costly than foreclosing, especially in a declining market. Lenders can avoid the costs of property maintenance, utilities and homeowners' association fees. Properties that go into foreclosure can take longer to sell, particularly in a declining market. There's also the chance that the property could be vandalized.

For borrowers, a short sale is the next worst thing on someone’s credit next to foreclosure or bankruptcy. It can be less of a black mark than a foreclosure on a borrower's credit record because it indicates that the borrower was working with the lender and once settled it’s listed on your credit record as SETTLED DEBT.

So if you are behind on your payments and only as a last resort a short sale is better than a deed in lieu, and certainly better than a bankruptcy or foreclosure.

Why should a seller consider a short sale?

A short sale is an option when foreclosure or bankruptcies are the other alternatives.  A short sale is still a negative mark on a sellers’ credit but not as bad as either foreclosure or bankruptcy. 

What are the downsides of a short sale?

If the lender absorbs the loss and allows the homeowner to walk away, the IRS looks at the value of that as taxable income.  And as mentioned above, a short sale will affect the sellers’ credit.  There is also the fact that the seller will not be able to stay in the home - it is a sale.  And, a seller may still owe the lender money after the short sale.

How does a short sale occur?

A homeowner would contact their lender and if no other options are available (negotiating a different payment plan, e.g.), the lender may agree to a short sale instead of foreclosing.  A lender may still choose to foreclose if foreclosure would result in a better outcome for the bank.  However if they agree, the lender would then require the homeowner to sell the house.  The homeowner hires an agent, who agrees to sell the house for a lower commission generally. 

If a buyer can be found for the property, the buyer submits an offer to the seller who, if accepts the offer, then forwards the offer to the bank.  The bank then either accepts the offer or does not depending on what the offer amount is and what the appraised value is determined to be, taking 4-6 weeks.   If the lender accepts the offer, a closing usually takes place very quickly.