What is a Short Sale?
From a homeowner viewpoint, a short sale is a transaction in which the lender is willing to accept a payoff of less than the balance due on the mortgage loan and consequently avoiding the lender foreclose on the property.
The lender is basically allowing you to sell your house for less money than the amount you owe. In other words they are willing to forgive part of the amount you owe and avoid foreclosing altogether. However, you may find properties that are involved in foreclosure that the lender is willing to consider a short sale transaction.
Why is the lender willing to do this? Because it cost them less money than to foreclose on the property.
An example
Suppose that you purchased a house for $300,000. To keep things simple, let's say that the value of the house has not changed since you purchase it and your mortgage balance is the full amount. Let's also assume that the market value is still $300,000 (Market value is defined as the amount of money that a buyer is willing to pay for the property).
You experience a catastrophic event such as the loss of your job. Therefore, you cannot make the monthly mortgage payments. You explain your situation to your lender and they agree to let you sell the property for $250,000. Remember that you owe $300,000 to the lender. So the difference of $50,000 (called the deficiency) is forgiven. So, when you close on the sale of $250,000, the lender keeps all the proceeds, you keep nothing, but your debt of $300,000 is now satisfied (paid off).
The good news is that you have prevented the lender from foreclosing on your property and damaging your credit. Once your personal financial situation is resolved (finding a job, etc.), you can become a homeowner again without much trouble.
If the lender forecloses your house the foreclosure entry in your credit report will stay there for at least 7 years. Once you have it, you will have a very difficult time buying any big ticket item (car, another house, appliances, etc.).
Please be aware that the process of short sales is not as simple as it is depicted in this post. A lot of details have been left out to simplify the definition of a short sale.
Comment Notification
Subscribe to this post's comments using