Understanding the Process of a Short Sale

Selling a home for less than what is owed is called a short sale. While homeowners may choose to sell their homes underprice for a variety of reasons, there are a number of restrictions and considerations to keep in mind before selling a short sale. With this information, sellers will understand what a short sale means and what to expect from one.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

Why Do People Choose a Short Sale?

Sometimes, homeowners need to sell a home, but they owe more on the mortgage loan than what the home can sell for. Selling a home for less than what is owed on the loan is called a short sale.

Although homes tend to appreciate in value over time, periods of a slow real estate markets may cause homes values to decrease. Additionally, if the home is not updated or maintained, it's also possible that the loan might be more than the homes worth. In other words, the seller can become what is called “underwater” on the mortgage. Generally speaking, it may be better to sell a home in a short-sale than go through a foreclosure.

How Does a Short Sale Work?

Since the lender who owns the mortgage has to accept less money in the case of a short sale, the lender must agree to a short sale from the very beginning. The owner of the mortgage may be the original lender, or someone who purchased the debt from the lender. The seller must obtain approval from the lender to seek a short sale. If they follow all the requirements of the lender, they can list the home for sale. The lender retains much of the decision-making power for the duration of the sale.

Who Sets the Terms on the Sale?

In a standard home sale, a seller usually works with a real estate agent to settle a sale price, determine which improvements to make, and how to engage with interested buyers. Because short sales are typically done when the homeowner is under financial duress, the lender places limits on the financial terms of the sale. The more money spent preparing and selling the home, the less money the lender will receive. As such, the lender typically has to approve any large expenditures related to the home.

Lenders also must approve of the sale price of the home. If there is more than one mortgage controlled by different parties, all lenders have to agree to the terms before the sale can proceed.

Are Short Sales Harder Than Typical Home Sales?

Because of the increase in the number of interested parties, short sales often take longer than a regular home sale. Through the typical home selling route, home sellers only need to accept a buyer's offer in order to move to the next step. However, with a short sale, all lenders will need to take time to review any offers and then decide if they want to accept or reject the offer.

Buyers may expect sellers to shoulder a portion of the costs of necessary repairs, especially when a sellers inspection may turn up certain needed repairs. Since the lender is generally in control of the short sale process, any repairs, even repainting the outside of the home, requested by a seller will also have to go through the review process, which also may lengthen the amount of time and difficulty of a sale. All of these factors could mean that a short sale may go in and out of contract a few times before the home is eventually sold.

Do Sellers Have to Repay the Shortfall?

Sellers who are successful with a short sale will probably take a hit on their credit report. They may also have other financial obligations from the sale, depending largely on state laws. Some lenders may ask sellers to make a contribution for the inconvenience of the lost money. Certain states also require sellers to count the shortfall on their income taxes.

Selling a Mountain's Edge home through a short sale may not be ideal, but it may be the right choice for sellers in certain situations. By looking at the specifics, sellers can determine the best steps to take for their homes.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.