A short sale is a special type of real estate transaction that involves the seller’s lender. During a short sale, a lender agrees to accept less than the remaining principal balance on the mortgage loan. In exchange, the lender gets to have a hand in the negotiations and must approve the final terms of the sale.
Short sales can take much longer than a standard real estate transaction but might mean a good deal for you if the lender has the motivation to sell quickly. Let’s take a closer look at the ins and outs of short sales and For Sale By Owner listings.
What Is A Short Sale?
A short sale occurs when a homeowner sells their property for less money than the balance of their mortgage loan. After the sale, the mortgage lender agrees to forgive the remaining balance on the loan. Mortgage lenders accept short sales only in limited circumstances. During a short sale, the lender controls the terms of the sale instead of the homeowner. The lender must approve the purchase price and any sale terms before you close. Even if you and the owner agree to the terms of a sale, the owner’s lender can still veto the sale.
Most owners who sell their homes through a short sale do so to avoid foreclosure. Foreclosure is a legal process during which a lender attempts to recover their investment by taking control of a property. Homes fall into foreclosure when the property owner falls too far behind on their loan.
Selling a property through a short sale instead of allowing it to go into foreclosure is beneficial for the owner if they plan to buy a new home. If you have a foreclosure on your credit report, you cannot buy a home for at least 7 years. On the other hand, if you sell your home through a short sale, you can buy another home in as little as 4 years. If you’re current on your payments, you can even apply for an FHA loan immediately after your short sale closes. Short sales also do much less damage to your credit score than a foreclosure as long as you stay up to date on payments.
If you’re thinking about buying a short sale home, know that the process isn’t the same as buying a home through a standard sale. You don’t only need to please the seller during a short sale – the lender will need to be happy as well. This means that your sale will likely take a lot more time to close than a standard sale.
Here are the basic steps you’ll take as the buyer in a short sale.
Create A Short Sale Contract
If the property you want to buy is on the market through a short sale, your real estate agent will need to write a sales contract to the lender who owns the homeowner’s mortgage.
Before a lender agrees to a short sale, they need to know that they’re getting a fair price for the property. A sales contract is basically a petition that presents evidence that the price you’re offering for the home is fair. The sales contract also includes the price and terms under which you agree to buy the property. Your agent will gather details on some other homes in the area comparable to the home you want to buy and their purchase prices. The agent will then submit the contract to the lender for their consideration. It can take 30 days or longer to hear back from the lender.
Wait To Hear Back From The Lender
After you submit your contract, you’ll spend a lot of time waiting to hear back from the lender. Remember that lenders only agree to short sales when they think they won’t be able to earn more money through foreclosure. The lender will take this time to do their own market research and consult with property experts to make sure they minimize their losses. They may even prolong responding to you to wait for other offers to roll in.
The lender can respond to a sales contract in a number of ways. They can flat-out reject the offer if they think you’re asking for too many concessions or lowballing them. They can also reject the offer with an outline of what they would accept. Of course, they can also accept the contract.
You cannot proceed with the sale unless the lender accepts it. This can mean multiple rounds of editing your sales contract or changing your terms.
Sign An Affidavit, If Necessary
An affidavit is a document that contains a statement that you swear is true under penalty of the law. Before you close on a short sale, the lender might ask you to sign an affidavit confirming that you and the seller have no prior relationship or agreement. Lenders do this to avoid fraud and collusion between buyers and sellers. Some lenders don’t require them.
If the lender does ask you to sign an affidavit, thoroughly read it before you agree. Never lie on an affidavit – the lender can take you to court if you get caught.
Proceed To Closing
Once your lender agrees to the sale and you sign any necessary paperwork, you can proceed to closing. Closing on a short sale is largely the same as closing on a standard home sale. However, after the sale, 100% of the funds go to the lender. The seller gets to walk away with the remainder of the debt forgiven – and you get to move into your new home.
How Do You Qualify For A Short Sale?
Not everyone can sell their home through a short sale. When a lender allows a short sale, they accept a financial loss. This means that you’ll need to meet strict standards before your lender will allow you to sell your property through a short sale.
To qualify for a short sale, both of the following conditions must be true:
- You cannot continue to pay for your loan. Lenders only allow short sales when they believe that there is an immediate risk of foreclosure. If you still have money to continue paying on your loan, your lender won’t accept a short sale. You usually need to be so far behind on your payments that there’s no way you can catch up on them before your lender will consider a short sale. You also cannot own any assets that you can sell to get up to date on your loan.
You might also qualify for a short sale if you can prove that you no longer have the income to keep paying on your loan. If you’re up to date on payments but believe you’ll fall behind soon, you can get ahead by writing your lender a hardship letter. A hardship letter explains why you will soon fall behind on your mortgage payment – you may lose your job, for example, or become disabled. Selling your home through a short sale while you’re up to date on payments will allow you to qualify for an FHA loan as soon as your sale closes.
- The home is worth less than the remaining balance on your loan. Your mortgage loan typically needs to be underwater to qualify for a short sale. If a lender thinks they can get back the full balance of the loan by foreclosing on the loan and selling the property, they’ll reject your short sale.
Do you think that you should sell your home through a short sale? The first step is to contact your lender. Every lender has different standards.
When Does It Make Sense To Do A Short Sale?
The only time when it makes sense to do a short sale is when there’s no way for you to avoid foreclosure. A short sale is almost always preferable to foreclosure. Short sales are more difficult to complete than standard sales. Both you and your buyer will need to jump through a number of procedural “hoops” before the sale can close. This can scare away first-time home buyers and anyone who wants to move into your space as soon as possible.
You also need to remember that the final say on a short sale always goes to your lender. Even if you want to sell your property through a short sale, your lender can veto the decision.
Can I Sell For Sale By Owner On A Short Sale?
Can a homeowner sell their own property without assistance from a real estate agent? The answer to this question is maybe (depending on lender requirements), but it can be difficult.
During a short sale, lenders want to move the property off the market as soon as possible. Every month you miss a mortgage payment, your lender loses more money. This means that most lenders will require a real estate agent to advertise the property on your behalf.
If you want to sell your own property on a short sale, ask your lender about their policies first.
A short sale is a special type of home sale that involves the seller’s lender. During a short sale, a lender agrees to sell a property for less than the balance on the mortgage. The lender forgives the remaining balance after the sale. Most sellers who list their home on a short sale do so to avoid foreclosure. The lender gets the final say on the terms of the sale and the price in a short sale. Short sales are more involved than standard sales and take much more time to close.
A lender must approve a short sale before it can go through. Not every homeowner can sell their home on a short sale. Most lenders will only approve a short sale if the homeowner is at immediate risk of foreclosure and the loan is underwater. It usually only makes sense to sell your home through a short sale if your only other option is foreclosure. Under most circumstances, you cannot list your home as FSBO on a short sale.