A question that is being asked frequently in the real estate market is, “What is a short sale?” Short sales used to be an infrequent type of real estate transaction, but with current economic conditions, more and more homeowners are opting for this type of sale. A short sale occurs when a homeowner sells their home for less than what is owed to the mortgage holder. There are pro’s and con’s for both the homeowner and the bank in a short sale.
There are several reasons why a mortgage holder, or bank, would agree to accept less than what is owed. A bank may benefit from a short sale for one or more of the following reasons:
- More cost effective for the bank to accept less because it would cost more to foreclose
- Banks do not want to own property
- Banks are in the business of making money
In a short sale transaction, the bank or banks involved must approve any offer that is received by the homeowner. The primary bank, the one that holds the first mortgage, will review the offer received to determine whether enough money will be made in order to make it worth agreeing to the short sale versus moving forward with foreclosure procedures. This may take some time as each bank has a lot of “red tape” the offer must go through.
There are reasons a homeowner may opt for a short sale on their home. A homeowner may benefit from a short sale for one or more of the following reasons:
- Credit score suffers less from a short sale than a foreclosure
- Remain in the home until an offer comes in that the bank accepts
- Payments may be suspended depending on the bank’s policy
To initiate a short sale, the homeowner must first contact the bank to discuss the option and learn the process the bank requires. General requirements are to provide a hardship letter outlining why they homeowner can no longer keep up with monthly mortgage payments, as well as providing earnings documentation. This should be done immediately, before the bank begins foreclosure proceedings if there have already been late payments. The bank will inform the homeowner whether or not they “may” accept a short sale, which will be dependent on any offers that are received.
There are a few downsides to short sales. For the bank, they forgive a portion of the mortgage in exchange for receiving some of the payment in full. For the homeowner, it means possible credit history hits, as well as being a very lengthy, stressful process.
In the end, a short sale can be a beneficial alternative for distressed homeowners and banks alike. It provides the homeowner with a way to get out from under a mortgage that they can no longer support, and it provides the bank with an option to costly foreclosure. It is a good idea for homeowners to consult a real estate professional as well as seek advice from a tax specialist to learn if there are tax consequences to a short sale.