Basics of a Short Sale

A short sale is an agreement between someone selling a home and their lender. The agreement is to sell the home for less then the amount of mortgage outstanding. The mortgagee gets to accept less then the loan amount so that they can avoid a foreclosure proceeding. The home buyer would receive a discounted rate. That discount works great for both the seller too because selling a house is hard in this market.

A short sale must be negotiated in the pre-foreclosure process no less then 35 days before the foreclosure notice is sent to the lender. The earlier in the process you act the better. The lender may want to go on with a regular foreclosure if the home has a good amount of equity. A regular foreclosure involves regaining the title to the property and selling it at market price. In this market, though, the seller with most likely avoid regaining the title.

The documents required for this process vary depending on the lender. A hardship letter giving the circumstances behind the short sale, a valid purchase and sales contract, pay check stubs, bank statements, and a preliminary estimate of proceeds to the lender are common requests. Just have your affairs in order and kindly oblige the lender.

Short sales are generally better for your credit report than foreclosures. If your lender is kind, she or he will give you a “paid” on the credit report. Sadly, it will also be documented that you paid less then you owed. The latter is not the best to have on your credit report, but it still beats foreclosure.

Some other things to consider include the prospect of profit, implications of bankruptcy proceedings, and appraisal. Since the home owner’s loan balance will be higher then the selling price of the home, a profit will not be made. A short sale is considered a collection activity which makes it prohibited if the home owner is going through a bankruptcy proceeding. The lender will need some sort of assessment of the home’s value at some point, so a request for professional appraisal may indeed be made. The lender may be able to take the loss on collections as a loss while the home owner may have to pay taxes on the amount outstanding to the lender.

Sometimes a short sale works for all parties involved. The home owners doesn’t have to pay for a home they can’t afford, the lender doesn’t have to pay for expensive foreclosure proceedings, and the buyer gets the home for a lower price.