You've probably heard the term "short sale" somewhere - in the news, online or maybe from a friend. But, you may not know what it is and when it can be a helpful strategy. For homeowners who can't afford their homes and the associated costs, such as home insurance, repairs and maintenance, anymore, a short sale can help them avoid foreclosure.
What is it?
A short sale is when someone sells his or her house, with approval from the mortgage lender, for less than what they owe on the mortgage. In essence, the lender is agreeing to take less money than they could legally require the mortgage holder to pay. For example, the owner may still owe $350,000, but only be able to sell the home for $250,000 and not be in the financial position to pay the difference. The lender may agree to sell the house for $250,000 and cut their losses.
When is it the best option?
In some circumstances, it's better for the homeowner and lender to get as much money as they can for a house than to deal with the hassles and costs of a foreclosure. A foreclosure will take time and money for the lender and damage the homeowner's credit. In the end, neither party truly benefits from a foreclosure.
If you can show other home prices in your area support the fact that your home is worth less than the current mortgage, and if you can prove to your lender you're unable to pay the difference between the likely sales price and mortgage, a short sale may be your best option to get out from under the financial burden of the house, Home Warranty of America advised. Some of the ways homeowners can show lenders they can't afford the mortgage payments are by proving they are unemployed, have filed for bankruptcy or have high medical expenses.
What are the effects of a short sale?
Short sales aren't always quick and easy, but the buyer will be able to sell the home without paying any further expenses because the lender usually pays for real estate costs associated with the sale. Once the sale is finalized, the homeowner usually has his or her remaining mortgage debt discharged. Ultimately, a short sale will result in lowering the homeowner's credit score, but not to the degree of a foreclosure.
Additionally, though lending rules have evolved over the past few years, owners who go through a short sale can qualify for a new mortgage sooner than someone who went through a foreclosure.