A Short sale may bring its share of headaches, but make no mistake, it is a whole lot better than going through a foreclosure. In this post I’ll cover everything you need to know about short sales and how to get started.
With a looming foreclosure it many people think that their best or only option is to stay in the home until they are forced to leave. But in most cases a short sale will save the seller and the bank a lot of headache and money.
A short sale is an agreement between you and your lender that you will sell your home for less than you owe the bank. It might be hard to believe that a bank would willingly lose money and allow you to avoid a foreclosure, but it can often be in the bank’s best interest to do just that.
Why Would a Lender Agree to a Short Sale?
Whether the lender forecloses on your home and sells it at auction, or allows you to short sell it at a loss, they are still going to lose money. Either way, it is unlikely that the price ultimately received will be any higher than fair market value.
In fact, the bank will probably get less money at a foreclosure auction then they could through a short sale.
This is because buyers cannot use typical mortgage financing to buy at auction. They must have the cash on hand (literally, they need to have cashier’s checks on hand to participate in the auction). This means the pool of buyers at auction is primarily made up of cash investors, and investors are only looking for one of two things: Deals & Steals.
By approving a short sale the lender opens up their pool of potential buyers to the general population of buyers in the local market. In today’s seller’s market, this will almost always catch a better price than a cash investor would be willing to pay.
Advantages of a Short Sale Process
Be a homeowner again more quickly
When you go through a major event like a foreclosure, bankruptcy, or short sale, it is going to affect your ability to get approved for financing next time you want to buy a house. The waiting period after a foreclosure is 7 years for most loan programs, but only 3 years for short sales.
So by selling short today, rather than allowing the foreclosure to go through, you are opening your options in the future.
Help your community’s home values
Because the bank will likely get more money from a short sale than it would from foreclosure, short sales actually help maintain property values. This is because the sale of your home will be used as a “comp” when valuing surrounding homes in the neighborhood.
How to Proceed with a Short Sale
The short sale process is more complicated than a typical home sale. You will need to gather evidence to present to the bank showing why you should be considered for a short sale. You’ll need to write a hardship letter explaining why are no longer able to make payments and that you have little to no equity in your home.
The steps involved can also vary from one lender to the next and from one type of loan to the next such as Conventional, FHA, and VA. There are also a lot of different parties involved including multiple departments or points of contact at the bank and loan servicing company.
A good Realtor that know his way through this process is probably the best first step when starting down this road. Because short sales are more complicated and there will need to be negotiations with the bank, you don’t want to take on this project alone.