Simply put, a short sale is a real estate transaction where the loan balance is higher than the sell price and the bank agrees to take the “short” amount as payment in full. The short sale can a be like a breath of fresh air for someone facing foreclosure. A short sale can be an extremely effective strategy to help homeowners who are headed to foreclosure.
If done properly, the result is the number of missed payments are reported as late payments on a credit report and the bank agrees to mark the account as paid in full. The alternative, foreclosure, can ruin a person’s credit for 7 years, prevent them from buying cars and homes, and even cause release from certain kinds of employment that stipulate there be no record of foreclosure on the individual’s credit report. And, in the case of foreclosure, the bank can file a judgment for the difference between what they netted from the sale and what was owed.
There must be a documented hardship
The bank won’t allow a short sale without a demonstrable hardship in the life of the homeowner. This can be a job loss, death of a spouse whose income was necessary to make the payments, divorce with the same circumstances, or additional expenses such as hospital bills. In the case of job loss, if employment is found and the income is less than before, that may also create a hardship, which makes paying the mortgage impossible.
Add to these major life events a market that has shifted and caused the home value to decline, or inventory levels to rise to a point where a quick sale is not possible, and the problem is compounded.
There could be other options
Nobody wants to deal with foreclosure and that includes the banks. There are programs in existence now and new ones coming online all the time that allow a homeowner to restructure their loan in such a way that the monthly payment amount is lowered and/or deferred for a period. The first step for anyone in the position of not being able to pay their mortgage is to contact the bank and ask what options are available. Don’t be afraid to call and don’t wait too long to do it.
A typical short sale scenario
- Homeowner has a loan balance of $200,000
- He lost his job and is unable to find employment
- Mortgage payments have been missed
- Lender sends a letter stating the loan is in default
- Homeowner contacts a Realtor to discuss selling his home
- The home was purchased with zero down payment and prices in the neighborhood are at $190,000 for comparable homes
- Any possible sale would be $10,000 short of satisfying the loan balance and there are no funds to pay selling expenses
- The Realtor suggests calling the lender to discuss other options, but without employment, no alternatives exist
- The Realtor lists the home as a short sale and finds a buyer willing to make an offer subject to lender approval as a short sale
- Foreclosure is avoided, credit is salvaged, the delinquent amount is forgiven and no judgment is issued, and the homeowner is able to relocate and/or pursue employment without the pressures of bill collectors calling about the missed mortgage payments
There are lots of moving parts
The short sale process is complicated and take an enormous amount of time and energy for a Realtor to manage. The above scenario is simplified just to give you an example of the typical flow of the process. In addition to what was described above, there are many other scenarios in which short a sale could be a viable solution.
If you are in a situation where you are unable to make your mortgage payments, and you do not see the situation turning around very soon, please contact someone for help as soon as possible. By acting sooner, rather than later, you will find that you have solid options to avoid foreclosure. I can be reached by email or by phone at 919-602-7000 if you would like to talk. Whatever you decide, please know that most of the time there are good, viable alternatives to the devastating effects of foreclosure.
Mr. Bob…If my Grandpa buys another townhouse in Highland Creek, but he is only 5′ 6″, is that considered a short sale ??
Well Sydney, your Grandpa would be more of a medium sale. We only refer to clients as a short sale if they are under 5′ 2″