FAQs - Understanding Short Sales

FAQs - Understanding Short Sales

Short Sales FAQs

  1. What is a short sale?

    A short sale occurs when a property is sold at a price lower than the amount the homeowner owes on the mortgage, and the homeowner's mortgage lender(s) agrees to the "short" payoff. A lender might accept a short sale with the property worth less than the balance of the mortgage, if the borrower cannot continue to make the monthly loan payment, does not have enough money to pay back the full balance of loan and needs to move out of the property.

  2. Is the mortgage lender’s approval necessary in a short sale?

    Yes, because in a short sale, the mortgage lender will be receiving less than amount the borrower owes on the mortgage. The lender needs to verify that the homeowner cannot continue to pay the mortgage and determine if a short sale is better than foreclosing on the property.

  3. Why do homeowners sell their homes through a short sale?

    Homeowners pursue a short sale when they can no longer pay the mortgage, need to move from the property and want to avoid a foreclosure. With a short sale, the impact on the homeowner's credit record might not be as bad as a foreclosure in some circumstances.

  4. Who benefits from a short sale and how do they benefit?

    • Home seller – Avoids foreclosure and the many headaches that come with a foreclosure, allowing a graceful transition into more affordable housing.
    • Buyer – Purchases a property at a fair market value and avoids having to deal with the risks of buying a foreclosed property.
    • Seller's mortgage lender – Mitigates its losses by avoiding the process of foreclosing and reselling the property.
    • All other parties – Listing agent, buyer's agent, appraisers, mortgage broker, the title company, and the insurance company will all earn a profit from a short sale transaction for services rendered.
  5. What are the pitfalls of buying a short sale property?

    • The short sale process may take more time than a traditional retail sale to complete and it may be difficult to pin down a firm closing date until the seller's mortgage lender(s) agrees to the short sale. Junior-lien holders such as second mortgages, HELOC lenders and other special assessment liens may also need to approve the short sale. If a buyer is bound by a specific timetable to buy a home, the short sale may not be an ideal route.
    • There are many roadblocks which can derail a short sale. With extra research, a buyer should be able to uncover the possible obstacles and plan for them.
    • Buying the property on an "as is" basis.
    • The seller of the property will normally have to pay some money at closing or agree to an unsecured debt in order to have the short sale approved. If the seller refuses, then a short sale may fall through even if the seller has approved the sale.
    • The approving lender will rarely agree to pay for any extras that a regular seller would normally agree to. This could mean higher closing costs for the buyer.  The buyer will need to shoulder those costs. (For example, the buyer covers the cost for inspections and repairs).
  6. If the seller is selling a property for less than what they bought it for, does that mean the buyer instantly earns equity on the property?

    Not necessarily. The seller could have bought the home at a time when property values were high, possibly in a booming market. Today, the housing market is down and the value of many properties has declined. If a buyer purchases a short sale property at a price that is lower than what the property is appraised for in today’s market, then the buyer enjoys a discount and picks up some equity. However, in today’s market most short sale prices are close to comparable retail sales.

  7. Why does the short sale purchase process usually take longer that a regular purchase?

    The seller's mortgage lender needs to thoroughly review a seller's short sale request. Gathering the required documentation and doing bottom-line reviews can take significant time to complete before a short sale is approved. Also difficult negotiations that take place between the parties involved, such as junior-lien holders and the seller, may delay the process.

  8. Can I complete a short sale purchase transaction on my own?

    Because of the complex nature of a short sale transaction, it is strongly recommended that buyers work with a real estate professional who has a track record in successful short sales. With the experience and connections, such an agent should be able to identify and help resolve possible hurdles, help put together a viable offer, protect the buyer’s interests, and negotiate the best deal.

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