What Is a Short Sale and How Does It Work?
If you owe more on your mortgage than your home’s value, or you’re struggling to manage your monthly mortgage payments, you’ll likely want to avoid losing your home. One option: going through the short sale process.
A short sale allows you to sell your home for less than what you owe on the mortgage. It requires lender approval, and your lender may forgive the remaining debt.
What is a short sale on a house?
A short sale is a homebuying transaction in which a home is sold for less than what the seller owes on the mortgage. This would be the case if local home values plummet and the seller’s loan amount is higher than what their home is worth, causing them to be underwater. If the seller is already behind on their mortgage payments, a short sale may be referred to as a preforeclosure sale.
The home sale proceeds are used to pay off as much of the loan balance as possible. In some cases, you may not be required to pay the difference between your outstanding balance and your home’s short sale price. It depends on whether your lender agrees to forgive the remaining debt or if you live in a state that doesn’t allow deficiency judgments, which require you to pay the difference between the home’s sale price and loan balance through wage garnishment or another arrangement.
You must get approval from your mortgage lender to sell your home in a short sale. Additionally, if you’re buying a short sale home, there are several considerations that may not apply to a typical home purchase. This includes accepting the property in as-is condition and paying desired repairs out of your own pocket.
Short sale example
Let’s say you owe $225,000 on your mortgage. Home prices have dropped and now the maximum amount you can get in a home sale is $175,000. Your home’s sale price is $50,000 short of your outstanding loan balance.
How the short sale process works
Similar to a traditional home sale, you’ll work with a real estate agent on a short sale. The main difference here is that you must also work with your lender throughout the short sale process.
The process of selling a short sale home involves:
1. Reaching out to your mortgage lender or servicer to determine your eligibility for a short sale.
This may involve evaluating whether you’re in danger of falling behind on payments, or determining how many days you’re already behind.
2. Completing a borrower response package or loss mitigation application.
You’ll need to fill out a mortgage assistance application to demonstrate your financial hardship by providing documentation, such as a divorce decree, medical paperwork or proof of a job transfer. You’ll also need to prove that you don’t have the cash reserves to bring your mortgage payments current.
3. Working with your real estate agent to market your home for sale.
Collaborate with your real estate agent to set a sale price for your home. Have your agent list your home on the Multiple Listing Service (MLS) and market it online the same way they would a traditional home sale. MLS rules may require your agent to disclose that the listing is a short sale in order to market it on the MLS.
4. Reviewing purchase offers with your lender.
Once you have buyers who are interested in your home, share the purchase offers with your lender for their review.
5. Agreeing to accept a buyer’s offer and close the deal.
If all goes well, your lender will eventually agree to accept one potential buyer’s purchase offer. At this point, you’d schedule and participate in a mortgage closing to transfer ownership of the home to the buyer.
The short sale process could take up to four months to be completed, though your timeline may vary depending on your circumstances. If you have a second mortgage on your home, such as a home equity loan or line of credit, that lender must also review the short sale terms to ensure they can recoup some of their money. The sale can be derailed if they don’t agree to the terms.
Short sale vs. foreclosure
A short sale is considered a loss mitigation, or foreclosure prevention, option that prevents you from losing your home after falling behind on payments or owing more on your home than it’s currently worth. Loss mitigation also benefits your mortgage lender, because it can keep them from losing a significant amount of the money they lended to you.
Foreclosure is what happens after you’re unable to catch up on missed payments. Your mortgage lender repossesses your home to sell it and recoup the money they provided for your home purchase.
|You sell your home for less than what’s owed on the mortgage.||Your lender sells your home to recover some or all of the money they loaned you.|
|Your lender(s) must approve a short sale transaction.||Your lender has the right to repossess and sell your home if you default.|
|You may owe the difference between your mortgage balance and sales price.||You may owe the difference between your mortgage balance and sales price.|
|Your credit score can drop by as many as 160 points.||Your credit score can drop by as much as 160 points.|
4 tips to prepare for a short sale
1. Determine whether a short sale is the best option for you.Are you truly ready to leave your home? If not, you may qualify for an alternative foreclosure prevention option, such as a mortgage modification or a repayment plan. A modification permanently changes the terms of your loan to make your payments more affordable. A repayment plan allows you to spread out your past-due mortgage payments over a set time frame: When you make your regular mortgage payments each month, a portion of the past-due amount is added to each payment.
2. Keep your home in good condition.It’s in your best interest to sell your home at a price that’s as close to your outstanding mortgage balance as possible. Keep your home’s interior and exterior in top shape. Declutter the rooms, do some low-cost landscaping and consider affordable staging projects.
3. Work with an experienced real estate agent.Ask for agent recommendations from friends and relatives, but be sure to work with a real estate agent who has experience in short sales. Look for agents who have specialized training in distressed properties, such as the Short Sale and Foreclosure Resource® professional designation. Remember to check online reviews and ask plenty of questions before moving forward.
4. Brace yourself for a credit score drop.A short sale leaves a negative mark on your credit report and can cause your credit score to take a nosedive. Research from FICO found that going through the short sale process can lower your score by as many as 50 to 160 points, depending on where your score started and whether you owe a deficiency balance.