Just What in the World is a Short Sale Anyway?

With the real estate market having gone through a major readjustment during almost two years now, you have probably heard the term short sale being bandied about.  You may be one of the many that is asking, just what is a short sale anyway?  The process can be quite convoluted, especially when there are multiple parties, i.e. insurers, second mortgages and other lien holders, involved, but the idea remains the same no matter how many parties are involved.

The idea behind a short sale is that the borrower has fallen upon financial and/or economic hardship and he/she cannot keep up with mortgage payments.  The borrower may be in default and foreclosure may be at hand.  However, in order to avoid foreclosure, which is quite expensive to the lender, the parties come to an agreement to sell the property for less than what is currently owed on the mortgage loan.  The borrower agrees to turn over the proceeds from the short sale to the bank and the bank agrees, as long as the settlement is clearly indicated in the acceptance offer, to extinguish the remaining balance on the mortgage loan.

It is important to take notice of the fact that the lender will usually include a clause on the short sale agreement whereby it will reserve the right to approve or disapprove any short sale.  The lender has final say on any short sale agreement and it will have had its experts conduct an assessment on the losses.  If the losses do not conform to the parameters set up by its experts, the lender will back out of the deal.  It is clearly beneficial to the borrower to have his/her own expert in this area handling matters because a real expert in short sales is trained for all of the intricacies involved in this type of real estate proceeding. 

A borrower is looking to mitigate the losses and avoid foreclosure.  This implies getting out from under some of the debt burden he/she may have incurred.  However, a short sale will stay on a credit report for seven years, just like all other entries do, with the exception of bankruptcy.  A short sale damages a credit report, but usually not as much as a foreclosure.  Typically, a borrower who has gone through a short sale can try to obtain another mortgage within 1 to 3 years after the short sale has gone through.

A short sale professional is recommended because the borrower is usually under the obligation to submit a short sale packet with a lot of information to the lender in order for it to be considered.  The borrower will have to disclose W-2s, pay check stubs, assets, provide bank statements, property value assessments, an agreement to list the property and even a hardship where the borrower states how and why he/she is in financial/economic hardship.  Some borrowers think that the packet provided by the bank is not obligatory to fill out and they fail to do so.  If the borrower fails to completely fill out the short sale packet, the lender will never agree to a short sale.  In addition, even if the lender agrees to forgive the balance on the loan, that does not mean that other lien holders will also agree to forgive whatever a borrower may owe them.  Therefore, I always recommend a professional for handling such an intricate and time-consuming process.