What Is A Short Sale?
The term “short sale” refers to a type of real estate transaction wherein lenders with security interests in a piece of real property mutually agree to release the liens on the property in exchange for less than what is owed by the borrower/seller. The “short” part of the terms refers to the fact that the lenders will receive an amount “short” of the amount still owed by the borrower/seller.
When Is A Short Sale Appropriate?
Short sale are generally reserved for borrower/owners that are experiencing some type of hardship or are “underwater” on their mortgage and therefore unlikely to sell the property for market value.
In recent years, lenders have become more willing to cooperate with borrowers suffering a hardship that prevents them from being able to continue paying their mortgage obligation. In this type of situation, a short sale is often preferable to the lender as opposed to the long and expensive process of taking the property through the foreclosure process. By allowing a short sale, the lender is attempting to limit the amount of potential loss it will take on the loan.
Commonly accepted hardships are:
Loss of employment or significant income
Extended or serious illness or injury
Unexpected increase in living expenses
Owners/borrowers that are “underwater” on their property may also want to consider a working with the lender to effectuate a short sale in lieu of foreclosure. A property that is underwater is one with a higher balance on the mortgage than its market value, rendering it difficult for the owner/borrower to sell the property unless they have the funds to pay the loan difference at closing.
Because the property is underwater, lenders will be unlikely to refinance at a lower interest rate or reduce the mortgage payments. This leaves the owner/borrower with a mortgage they cannot afford and a home they cannot sell, leaving two options: short sale or foreclosure.
Why Short Sale?
Short sales are preferable to the alternatives, bankruptcy and/or foreclosure, because they provide needed financial relief with less long-term damage to credit. After a short sale, the owner/borrower may be eligible to purchase another home immediately while a foreclosure may preclude another purchase for up to seven years.
Does The Mortgage Have To Be In Default?
No. Many lenders will consider allowing a short sale even when the owner/borrower is current on the mortgage payments. Lenders want to avoid as much loss as possible and, given a good enough reason, will take steps to avoid putting the owner/borrower in a position where he or she cannot make the loan payments.
As demonstrated by the above, the decision to proceed with a short sale transactions can be a difficult one to make. Further, the short sale process can be lengthy and complex and is made even more difficult by having to deal with lender red tape.
However, the assistance of an experience real estate attorney can make the short sale process much easier to handle. If you have questions regarding the short sale process, or need additional information about real estate transactions, contact the experienced real estate attorneys at The Slater Firm, Ltd. today.