What is a Short Sale and How Does it Differ from a Foreclosure?
Millions of homeowners lost their homes to foreclosure during the housing market crash which started in 2007. Starting in 2007 many American families discovered that their homes were worth less than what they owed on their mortgages. They couldn’t sell their homes and millions were facing foreclosure because of predatory lending practices, a subprime mortgage crisis, unstable economy and a market that couldn’t sustain the booming housing growth. This led to the real estate bubble we are all familiar with and, it had just burst. Many homeowners looked at loss mitigation options, and turned to selling their homes short. Unfortunately, homeowners STILL face multiple financial hurdles today and home equity did not just come back for most of those homeowners. Because of this, short sales are still a widely accepted form of avoiding foreclosure in the real estate market.
What is a Short Sale?
A short sale, simply put, is when you sell your home for less than the balance remaining on your mortgage. If your mortgage company agrees then they are accepting a portion of your mortgage balance. Depending on your situation, they may accept that portion as payment in full, or may ask you to sign a note for the balance or contribute to the sale with cash.
Homeowners may be behind in payments or be paying on time but may face imminent default. In both situations a homeowner may qualify for a short sale.
How is a Short Sale Different than a Foreclosure?
Mainly, a short sale helps the homeowner avoid a foreclosure, the latter of which is when the lender or mortgage company takes sells and possession of the home Forcefully. With a short sale the homeowner has some say in how the home is sold.
A foreclosure does more damage to the homeowner’s credit rating and makes it difficult to take out any new loan–such as a car, student, or home loan.
The lender or mortgage company is in control of the home’s fate and arranges to sell it off whereas in a short sale, the owner has control over selling the home and working with their own real estate agent. (might be redundant)
Why Homeowners do Short Sales
- Financial Troubles. The owner is not able to make the payments on the mortgage or to pay off their loan. The bank may threaten foreclosure after a certain amount of payments have been missed.
- Credit Rating. Doing a short sale can preserve the owner’s credit rating. There is less of a hit doing a short sale rather than a foreclosure and makes it easier to secure a new loan in the future.
- Inherited or Damaged Properties. Perhaps the owner has inherited the property from a family member who has passed or is no longer residing at the property. The home may be distressed or need too many repairs that they cannot manage on their own. Working with a lender or mortgage company to do a short sale may be the quickest and easiest option. (Possibly a reverse mortgage short sale)
- Investment Property. This is similar to having financial difficulties. The property might not be a primary residence and instead the owner had hoped to unload or flip it to make money. It may have been located in an area where they cannot make their money back or they are for some reason unable to sell the home after investing fund in it.
- Social Stigma. Many owners would rather take a dignified approach to resolving their mortgage troubles. It can bestow a feeling of self-worth and feel empowering to choose the outcome and negotiate with their lender or mortgage company rather than simply sit back and wait to be foreclosed on. They can also avoid their family, friends and neighbors finding out that they couldn’t pay their debts and their house was repossessed.
- Avoid Foreclosure. This is a strategic move and can be used before or even after the owners have gone delinquent on their payments. After exhausting other alternatives such as renting out the property, refinancing or doing a loan modification, this may be the best option for avoiding foreclosure.