A short sale is a sale in which a homeowner, or seller, accepts an offer for their home that is less than the amount owed on the mortgage but the lender agrees to accept that amount. As such, the seller ends up "short" when paying back the total loan amount owed but is able to close the sale of the home. Short sales accounted for 5% of all distressed home sales in 2017 according to a RealtyTrac report.
Short Sale vs. Foreclosure
Short sales are initiated by the homeowner in order to get out of a mortgage and avoid foreclosure, usually, after homeowners have missed payments or are delinquent on mortgage payments and owe more than the home is worth.
A short sale can have less of an impact on your credit than a foreclosure, which is typically initiated by a lender against a delinquent borrower.
How Short Sales Work
A short sale works like a typical home sale at first, with the seller contacting a real estate agent to list their home. The seller lets the agent know it is a short sale, then waits for an offer to be made by a buyer. Once an offer is made and accepted, the seller needs to get that offer accepted by the bank; in a traditional sale, sellers don't need the approval to accept (or reject) an offer.
Mortgage lenders usually require the seller to prove the need for a short sale by submitting financial documents, such as a W2 and income statements, along with a hardship letter or affidavit that explains why the seller can no longer make mortgage payments.
From there, the lender will have the home appraised to evaluate whether the offer made is a good one or not. Lenders are often willing to approve short sale offers below market value in order to avoid having the home go into foreclosure, which is a costly and time-consumer process for lenders as well as borrowers.
Should I Buy a Short Sale Home?
Short sales can make for a good deal depending on the price and the condition of the home. Potential buyers should do their research:
- Check with a local real estate agent, preferably one with experience with short sales, to determine if the home is listed under market value.
- Review the history of the home through real estate sites or from public property records.
- If possible, see the home for yourself and examine the surrounding neighborhood.
Are Short Sale Home Prices Negotiable?
Yes, short sale home prices are negotiable. The short sale bank or mortgage lender is the one who decides on whether the offer presented to them is acceptable or not. Negotiable items on the home can include the price and closing costs, among other things.
Potential short sale home buyers have to remember that, while the seller may accept your offer, it does not mean the lender will approve it. Sellers are motivated to sell in this type of situation but lenders will want to evaluate the offer and gather any relevant information they feel is needed to make a good decision.
What Are the Risks of a Short Sale?
Risks for Sellers
The risks of a short sale for sellers are that you may not find a buyer or you may not receive an approval from your bank or mortgage lender. If the seller cannot find a buyer, they risk having their home fall into foreclosure. The seller also has to qualify in order to sell their home as a short sale through their bank or lender.
Risks for Buyers
The risk of a short sale from the buyer's perspective is that the process to purchase takes a long time because the homeowner's mortgage lender has to approve the sale. This process can take up to four months, which may impact the buyer's own home sale or living situation. In some cases, potential buyers end up walking away from a short sale because of the amount of time involved.
Since the mortgage crisis, there's been a growing market of home buyers who pursue a short sale or foreclosed homes as investments. Buyers should make sure that homes listed as short sales have owners who are qualified by their bank or lender. Buyers should also make sure to compare the short-sale price to the current market value of comparable homes listed or sold recently.
Both sellers and buyers should also consider using real estate agents who have experience with short sales. Sometimes real estate market trends can drive down a home's value over time and have an experienced agent can help manage expectations for an appropriate selling and purchasing price.
What Are the Impacts of a Short Sale on Your Credit?
A short sale is considered negative information and it will stay on your credit report for seven years from the original delinquency date of the mortgage. If your payments were never late, the mortgage will remain on your credit report seven years from the date it was reported settled or paid.
While the term "short sale" does not appear, your credit report does describe a "negotiated settlement" of your mortgage debt for less than originally owed. Anytime an account is reported that way, it will hurt your credit history and credit scores.
A short sale, or settled debt as reported on your credit report, will have a greater impact than other types of settled debts with a possible credit score drop between 120 and 130 points depending on the credit score used.
Payment history is the most important factor in credit scores and by getting behind on your mortgage payments it will have an immediate and severe impact on your credit scores. If you were entering a mortgage modification program and never missed a payment, then your scores would not be negatively impacted at all.
Before agreeing to a short sale of your home, make sure you understand how the account will be reported by your lender so you know what the financial impact may be. The National Foundation for Credit Counseling is a good resource if you want to seek the guidance of a financial advisor who can help you navigate your options.
Unfortunately, too many homeowners are pressed into a short sale by financial burdens that are preventing them paying their monthly mortgage payment. If needed, a short sale can be a viable solution to avoid a foreclosure for the seller and the bank.