What is a short sale?

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In a Nutshell

A short sale can be a good way to avoid foreclosure and manage your credit if you’re struggling to pay your mortgage. But short sales can be complicated and might lead to more costs over both the short and long terms.

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If you’re behind on your mortgage payments and don’t think you can catch up, a short sale could be an option to preserve your credit.

A short sale involves selling your house for less than what you owe on your mortgage. You may consider negotiating a short sale with your lender as an alternative to foreclosure if you can’t make your payments. This might help lessen the ding to your credit scores and help you get back on your feet more quickly — though you’ll still have to leave your home. But going the short sale route might not be your best option. We’ll look at the pros and cons of a short sale and what to watch out for if you’re considering one.



How a short sale works

Short sales may be an option for homeowners who are struggling with or behind on their payments and underwater on their mortgages. “Underwater” means that you owe more than your home is worth — it’s also called negative equity.

If you find yourself in this position, lenders typically request that you contact them first. Your mortgage lender will evaluate what options you have, which may also include a loan modification, forbearance or a repayment plan.

Each lender has its own requirements for who is eligible for a short sale. In general, though, you must be able to prove that you can’t pay your mortgage. You’ll likely need to document your financial hardship as part of the process, too.

If you’re eligible for a short sale, your lender will typically arrange for an appraisal and home inspection of your property. But you’ll likely be responsible for finding a buyer on your own.

When you get an offer to buy your home, you’ll need to present it for lender approval alongside any applications or paperwork your lender requires. Keep in mind that your lender may reject an offer it considers too low.

If you get sign-off from the lender, the sale can head to closing. Unfortunately, you won’t get to keep any funds from the sale — all proceeds will go to your lender. Some lenders may offer an allowance to help you with the costs of moving out, but it’s not guaranteed.

Risks and downsides of a short sale

While short sales can be a good option to help you get out from under your mortgage, there are still significant downsides.

You lose your home. There’s no way around this one. This is a sale, so you’ll be moving out of your home when the transaction is complete. That’s why you may first want to look into a loan modification, which could help you keep your home.

You don’t get any windfall from the sale. Since you’re selling the home for less than you owe, any proceeds from the sale go to the lender to help pay back your mortgage. You won’t get to keep anything.

You may need to pay any “deficiency.” When you complete a short sale, you’re selling the home for less than what you owe. The difference between the sale price and what you owe is known as a deficiency. In many cases, your lender will agree to waive the deficiency, which would mean you’re not on the hook for the money. But in other cases, you may be on the hook for the deficiency, and in some states, your lender can sue you to recoup the remaining mortgage debt.

The process can take a long time. Short sales are complicated. Because your lender must approve any short sale, the process involves more than just getting an offer and accepting it. Plus, you’ll need to prove that you’re eligible for a short sale, and some offers may be rejected.

Your credit will suffer. A short sale will appear on your credit reports, though the effect can vary depending on your circumstances (including how many mortgage payments you’ve missed). While the drop in your credit scores from a short sale will likely be better than with a foreclosure, your score will still go down.

You may not be eligible to buy another home for a period of time. Lenders often require a waiting period after a short sale before they lend you money for a new mortgage. The good news is that this period can be as little as two years — much shorter than the typical seven-year waiting period after a foreclosure.

Is a short sale better than a foreclosure?

Avoiding foreclosure by proceeding with a short sale can be better for both you and your lender.

In a foreclosure, your lender takes legal action to take back your home if you fail to make your mortgage payments. This usually happens a few months after you stop making payments. Foreclosures can have a devastating impact on your credit, and you usually need to wait seven years after a foreclosure to be eligible for another mortgage.

A short sale preempts the foreclosure process. Your lender agrees to take the proceeds of the sale of your home instead of pursuing the legal path of foreclosure. You have to leave the home with either transaction, but a short sale avoids many of the worst aspects of a foreclosure.

Buying a short sale property

If you’re looking to buy a house, you may come across listings for homes in the short sale process. Brokers are required to disclose that a home they’re selling would be completed as a short sale.

Buying a short sale can be a good way to get a home at fair market value, but there are plenty of risks to be aware of. Short sales often take longer to close than a traditional sale, and there are plenty of stages where the deal can get tripped up. You’re also usually buying the home from the seller as-is (without repairs), and you aren’t likely to get many concessions on closing costs.

If you decide to go this route, you might want to work with a real estate agent who specializes in short sales to help make the process go more smoothly.


Next steps: What to do if you’re considering a short sale

If you decide a short sale is right for your situation, consider taking these steps to help you get started.

Consider finding a housing counselor. The U.S. Department of Housing and Urban Development has a list of approved counselors who can help you navigate the short sale process.

Ask your lender to waive any deficiency. You don’t want to be stuck paying the mortgage balance after short-sale transactions. Be sure to request that your lender forgive the amount. If it agrees, make sure to get it in writing.

Watch out for scams. Criminals often prey on people at risk of losing their homes. Be sure to use a licensed real estate professional to help you with the short sale — and watch out for any companies that try to charge you upfront fees.

Communicate with your lender. A short sale requires sign-off from your lender. Make sure you keep it up to speed on all the actions you’re taking as you go through the process.


About the author: Andrew Dunn is a veteran journalist with more than a decade of experience as a reporter and editor at North Carolina news organizations, including the Charlotte Observer and the StarNews… Read more.