Shortsale: How to Sell Your Home for Less than You Owe

Shortsale refers to any type of real estate being sold for less than the borrower owes on their mortgage note. Lenders authorize selling the property short of what is owed based on several factors. One of the most prevalent factors is if short selling will be less costly than allowing the property to fall into foreclosure.

The majority of shortsale homes are sold for 7- to 10-percent below market value. Many borrowers hold a second mortgage and may owe upwards of $100,000 more than the appraised property value. In this case, it can be less costly for banks to foreclose on the property and hold it until housing prices go up.

Mortgage financier, Freddie Mac, states the average cost of foreclosure is between $60,000 and $80,000. The foreclosure process typically takes eighteen months to complete. It usually takes between six and twelve months before banks seize the property and place it for sale through public auction. Property is returned to the bank if no one places a bid. The bank becomes responsible for maintaining the property until it sells.

On the other hand, the short sale process usually takes four to six months to complete. The property is sold to another buyer. Once the deal is complete, the borrower is released from the loan and the bank transfers the property to the new owner. Although the bank incurs a loss on their investment, they save time and money in the long run.

Banks are limited to the number of real estate owned (REO) properties they can hold. With the ever-growing number of foreclosure homes many banks are rapidly approaching their quota. Most banks will short sell properties requiring substantial repairs and retain properties that are well-maintained and located in popular areas.

The shortsale process is tedious, complicated and time-consuming. However, it can be a saving grace to borrowers who do not have the financial means to cure mortgage arrearages and continue making monthly payments.

Mortgage lenders require borrowers to submit a short sale packet which includes financial records, list of income and expenses, short sale hardship letter, and various other documents. In most cases, banks require borrowers to have a buyer lined up before granting short sale approval. Some lenders will grant borrowers' time to list their property through a realtor.

Two types of shortsale transactions exist. The first is known as Payment in Full without Pursuit of Deficiency Judgment. This means the lender will accept the sale price as payment in full and release borrowers from their loan. Payment in Full short sales will affect the borrower's credit. However, if the debtor is able to get back on track financially they can apply for another mortgage loan within a few years.

The second type of shortsale is the Deficiency Judgment, which means banks hold the borrower responsible for the difference between the sale price and loan amount. This can amount to thousands of dollars, making it nearly impossible for the borrower to ever repay the debt.

Deficiency judgments are reflected on borrowers' credit history until paid in full. For many people, this can be a lifetime and will rob them of ever being able to obtain affordable credit.

Short sales remain on credit reports for up to seven years, while foreclosure sticks around for ten years. Deficiency judgments might never go away.

It is important to weigh the pros and cons of short sale transactions. Take time to become educated about the process; what is involved; what to expect; and the long-term effects. When properly structured, short sales can be a win-win solution for all parties involved.