Occasionally, homes come on the market being sold as a “Short Sale”. But:
What is a Short Sale?
Well, the simple definition of a short sale is selling your home for less than what is owed, with the approval of the lender.
In other words, you are seriously behind in your mortgage payments, and you must sell your home. You owe $300,000 on the existing mortgage, but the home is only worth $200,000. The new purchase price cannot cover the loan, and you, the homeowner, cannot cover the shortfall. That’s where a short sale comes into play. The lender allows you to sell the home for the lower amount without you having to pay the shortfall at closing, thus giving the home a clean title and getting you out from under an unaffordable monthly mortgage payment.
Why would a bank agree to a short sale?
Because contrary to popular belief, Banks do not want to foreclose on a property. The foreclosure process can take anywhere from a few months to a few years, and during that time, the bank is having to spend an incredible amount of money on legal fees and holding costs (including home insurance and property taxes). Then when the foreclosure is complete, the lender then needs to sell the house on the market as a foreclosure which takes more time, and more money. All this for a home that is underwater to begin with. Is it any wonder why lenders would opt for the short sale? Sure, they might lose money, but not as much as they would otherwise.
What happens to the remaining balance on the loan?
This depends greatly on the agreement that you came to with the bank. But as a general rule of thumb: Unless the bank explicitly waives their right to come after the homeowner at a later date, the borrower may be on the hook for the unpaid balance! So make sure that you get this detail spelled out in writing before completing the short sale.
Are there other options besides a short sale?
A short sale is only one option if you are having difficulty with your mortgage payments. Here are 4 other alternatives:
A loan modification is when the lender permanently changes the terms of the loan to make the loan more affordable to the homeowner. Most lenders will look at a loan modification under a program known as the Home Affordable Modification Program or HAMP. HAMP is a government program created in 2009 to help struggling homeowners.
For more information on the HAMP program, see MakingHomeAffordable.gov.
Deed in lieu of Foreclosure
A deed in lieu of foreclosure, also known as a “mortgage release”, is exactly what it sounds like. The homeowner agrees to give the legal title of the property back to the lender, and in exchange, the lender agrees not to foreclose. Most lenders, however, want to see that attempts have been make to sell the home with a real estate agent before they will agree to a deed in lieu of foreclosure.
Not the best option, but unfortunately, it is sometimes unavoidable. I would only recommend this alternative after all other avenues have been exhausted.
If you are not underwater, then just sell the house. This can be a hard alternative to entertain. This is your home. This is your family’s home. But in my experience, home is wherever you are happy and with the ones you love. A house is just a thing.
I hope that I have explained a little bit about short sales in a way that make sense. By no means is this avenue an easy one, and the steps to actually pull one off is the subject for another day. But just know that there are options out there for you if you struggling. It happens to the best of us.