When it comes to home buying, mortgage loans are so common. In such cases, the lender will always have a security interest on the concerned property, and in case of default of mortgage payments, the lender can proceed with foreclosure. As a foreclosure can affect the credit history of the borrower, he/she will try to avoid it with all possible options. Even the lender may sometimes favor avoidance of foreclosure, so as to avoid the expenses, and procedural delays. In such situations, the most sought-after option by both parties, is short sale.
What is a Short Sale
If the borrower finds no way for mortgage payments, then he/she can approach the lender, suggesting a short sale. A short sale is the sale of the real estate by its owner, with the consent of the lender, who has provided the necessary loan amount for purchasing the said property. In case of a short sale, the sale proceeds can fall short of the amount owed by the borrower to the lender. The basic principle behind a short sale is that the borrower can sell the property (for which he has taken the loan) and repay the lender, if the latter agrees. However, there is no guarantee that he would get a good price for his property, and repay the debt. If he fails to obtain the remaining loan amount through the short sale, then the lender may sometimes consent for such sale, on certain terms and conditions. In such cases, the remaining loan amount may or may not be written off by the lending institution. The most important factor of a short sale process is approval by the lender, and the terms and conditions for the same.
How Does it Work
- First of all, the borrower has to approach the loss mitigation department of the lending institution, and apply for a short sale. Thereafter, the loss mitigator acts as a mediator between the borrower and the lender, but he cannot approve the application as such.
- The lender has to undergo certain procedures, in order to get qualified for a short sale. The borrower must have made a default in mortgage repayments for at least one month (31 days). The current value of the said property must be less than the remaining real estate loan amount. The borrower should not have any assets other than the said property, and he must be facing real hardship in repaying the loan.
- Above all, if the foreclosure procedure has already been started, then an application for short sale will not be entertained. The application for short sale will be approved by the lender, only after considering all the factors that are mentioned above.
- The borrower may have to undergo financial audits, and may also be required to submit various documents. Most of the mortgage lenders require the borrower to furnish a short sale hardship letter, stating his problems that led to the default.
- Some of the lenders require the borrower to find a buyer, so as to approve the application for short sale. Some others may approve the application, and then allow the lender to find a buyer within a stipulated period. In case the buyer fails to buy the property, foreclosure will happen.
- The most important part is the terms and conditions regarding the remaining amount, i.e., the difference between the sale price and the loan amount. In some cases, that amount will be written off, but others need to pay it to the lender. The former type of short sale is called payment in full without pursuit of deficiency judgment, and the latter is called deficiency judgment. The lender and the borrower have to negotiate these terms before the agreement.
In short, a short sale is a good option for the borrower to avoid foreclosure, if the lender agrees for it. Thus the borrower can avoid any negative effect on his credit score. However, a short sale too can affect the credit score of the borrower, but not as severely as a foreclosure. The borrower may also negotiate with the lending institution regarding the subject.
How does a short sale work for a buyer? From the buyer's part, a short sale is always a profitable deal, as he gets a property at a much lesser price. Even the lender may benefit, as he can skip the procedures and expenses of a foreclosure. Even though a short sale is a much sought-after option to avoid a foreclosure, the borrower and the lender must negotiate the various terms and conditions, before reaching an agreement.
Disclaimer: This article is for informational purposes only, and should not be used as a replacement for expert advice.