Foreclosures aren't pretty. By the time you reach the point where a lender is prepared to foreclose on your home, you've likely been through months -- maybe even years -- of missed payments, warning letters and failed negotiations. You may feel that you've exhausted all your options to save your home, or at least to get out of the financial mess with minimal damage to your credit [source: Foreclosure Questions].
It's likely you're desperate for a lifeline. Luckily, there's an option that may provide that final-hour solution: A short sale, if you qualify for one, could get the unaffordable home off your hands, clear your mortgage with the bank and keep your credit from taking the massive hit it would face with a foreclosure judgment [source: Experian].
In its most basic definition, a short sale is a home sale where the bank agrees to let you sell your home for less than you owe on your mortgage. The new owner gets the home at a sometimes substantial discount, and the majority of your unaffordable mortgage is paid off [source: Foust]. You'll still owe the lender the remainder of your mortgage, but the lower amount owed improves the chance that the bank will write off the loss, rather than going through the cost of filing a judgment against you for it.
When conducted properly, a short sale can be an "everyone wins" situation: You're free of your mortgage with less-than-foreclosure credit damage, a new homeowner gets a home for a good price, and the bank clears a failed mortgage loan from its books [source: All About Real Estate Short Sales].
However, short sales aren't without risks, and they aren't a solution for every situation. Read on to learn more about who typically qualifies for a short sale, how the short sale prevents a foreclosure and what parts of the process you need to watch to ensure that your short sale is a successful alternative to a foreclosure.
Not every distressed homeowner qualifies for a short sale. Also, since the agreement to allow a short sale depends on you making a convincing case to your lender, even a distressed homeowner who's eligible for short sale may not have that option. If you're considering proposing a short sale to the bank, make sure you understand -- and meet -- its requirements before you make the proposal [source: EForeclosureMagazine.com].
Lenders generally accept short sales for homes that meet certain criteria. First, the home must be in mortgage default, meaning that you've missed enough payments that the bank is ready to begin foreclosure proceedings against you. Second, the home should be worth less than what's owed on the mortgage. Thanks to widespread home overvaluation during the housing boom of the past decade, this is unfortunately the case for many mortgages, both whole and delinquent. But you'll likely need to have your home appraised to verify that it is indeed worth less than what you owe on it [source: EForeclosureMagazine.com].
The final qualification for a short sale is proof of financial distress. You'll have to show your lender that paying your mortgage would put you in significant financial hardship, or that a job loss, death in the family or other major incident is hampering your ability to pay. Likewise, many lenders will expect to see a list of your assets; you'll need to show the bank that you don't have cars, savings or other property that it could pursue to cover the mortgage. Once you know you meet these conditions -- and any lender-specific criteria that you may have to consider -- you can prepare your proposal for short sale with the confidence that you have the best possible odds of the bank allowing you to pursue this lifeline [source: EForeclosureMagazine.com].
The Short Sale
A short sale is much like a normal real estate transaction, but there are a handful of factors to keep in mind that can complicate a short sale.
First, remember that the short sale process usually starts after the bank has already begun filing notices of delinquency. That's one of the early steps in the process that starts the clock ticking toward foreclosure. If your house -- even at a lower, short sale price -- stays on the market without attracting a buyer, enough time may pass that the bank will proceed into foreclosure. It's critical that both you and your real estate agent understand the bank's time limits before starting the short sale process [source: EForeclosureMagazine.com].
After the short sale is completed, you'll likely feel a huge sense of relief -- the specter of foreclosure is no longer hanging over your head. But you may still face penalties stemming from the delinquent mortgage if the short sale doesn't cover the entire amount owed on your mortgage. If the remaining amount is low enough, the bank will often decide it can't be pursued profitably in court. In this case, the bank would write off the remainder. This would leave a negative mark on your credit but would save both you and the lender the time, cost and hassle of a delinquency suit.
There are cases, however, where the bank will decide to pursue the remaining amount you owe on the mortgage. While this will leave you liable for much less than the original delinquent mortgage, it means you're still vulnerable. And again, while you won't face the credit hit that comes from a foreclosure, the deficiency judgment that the lender is pursuing will make it harder for you to borrow money in the future [source: Experian].
The "lifeline" analogy is fitting when considering a short sale; the process can save you from the nightmare of a foreclosure. But like a line thrown out in a rough sea, there's not a watertight guarantee that you'll reach it and be pulled to safety in time. A short sale may minimize the damage you sustain from an unaffordable mortgage, but you're likely to still face expenses -- and credit damage -- from the situation.
To learn more about short sale and foreclosure, check out the links on the next page.
- All About Real Estate Short Sales. "Benefits of Buying a Short Sale." (March 23, 2011)http://www.realestateshortsale.net/buying-short-sale.html
- Christie, Les. "You lost your house -- but you still have to pay." CNNMoney. Feb. 3, 2010. (March 24, 2011)http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/
- Dempsey, Bobbi. "10 steps to 'short sale' buying." Bankrate.com. 2010. (March 24, 2011)http://www.bankrate.com/finance/money-guides/10-crucial-steps-to-short-sale-buying-1.aspx
- EForeclosureMagazine.com. "How to Qualify for a Short Sale." (March 24, 2011)http://www.eforeclosuremagazine.com/mortgage/how-to-qualify-for-a-short-sale
- Experian. "Impact of mortgage 'short sale' on your credit report." May 14, 2008. (March 23, 2011)http://www.experian.com/ask-experian/20080514-impact-of-mortgage-short-sale-on-your-credit-report.html
- Foreclosure.com. "Real Estate Short Sales." (March 23, 2011)http://www.foreclosure.com/shortsales.html
- ForeclosureFish.com. "Who Can Sue You for a Deficiency Judgment ... And Will They?" Feb. 27, 2008. (March 25, 2011)http://www.foreclosurefish.com/blog/index.php?id=412
- Foreclosure Questions. "How does the Foreclosure Process work." Feb. 14, 2011. (March 24, 2011)http://www.foreclosurequestionsguru.com/
- Foust, Dean. "The new exit strategy: A short sale." Bloomberg Businessweek. March 5, 2007. (March 24, 2011)http://www.businessweek.com/the_thread/hotproperty/archives/2007/03/the_new_exit_strategy_a_short_sale.html
- Freddie Mac. "Avoiding Mortgage Fraud." (March 24, 2011)http://www.freddiemac.com/avoidfraud/
- National Association of Realtors. "Field Guide to Short Sales." March 2010. (March 25, 2011)http://www.realtor.org/library/library/fg335
- Hartley, Daniel. "The Impact of Foreclosures on the Housing Market." Federal Reserve Bank of Cleveland. Oct. 27, 2010. (March 25, 2011)http://www.clevelandfed.org/research/commentary/2010/2010-15.cfm
- Rapoport, Gary. "Who Benefits From A Short Sale Real Estate Transaction?" (March 23, 2011) http://www.garyrapoport.net/who_benefits_from_a_short_sale_real_estate_transaction.htm