What Is A Short Sale?
If you’re a homeowner and having problems furnishing the mortgage payments on a property, then a short sale is something you should seriously consider. Short sales are much better than foreclosures as they don’t affect your credit ratings, but foreclosures can taint your credit report for as long as seven years.
Lenders also prefer short sales to the lengthy legal process common with foreclosures.
As a buyer, a short-sale home can provide you with a good purchase offer as they usually cost less than their original market value.
Nonetheless, there are things to know for both buyers and homeowners. Here, we discuss what each party needs to know about short sales.
Short Sales: A Definition
A short sale happens when a lender is willing to accept a price for a home that is less than the amount owed by the current owner. Typically, when lenders issue mortgages to homeowners, they aim to recoup their credit alongside some returns in debt repayment.
Then, if the homeowner wishes to sell, they should do so at a price more significant than the amount left on the mortgage. With this, lenders can still get their profit.
However, instances arise when lenders have to accept lower prices to sell the property. This is called a short sale.
The instances that warrant a short sale include:
- Crash in the mortgage markets
If there is an economic recession or the central bank raises interest rates, the housing market often experiences a downturn, falling prices.
In this case, properties don’t cost as much as they used to. As a result, banks/lenders are forced to take lower prices for a property.
- The homeowner is unable to repay the mortgage
If the current owner has fallen behind on mortgage repayments, a short sale can be a way out to prevent foreclosure.
Short Sale is Different from Foreclosure
Yes, both involve a situation where there is the need to sell property cheaply because the homeowner defaults on the mortgage. However, they are different.
For the short sale, the homeowner starts the process of selling the house and finds a buyer when they discover they can’t continue with mortgage repayments. The seller (homeowner) and the intending buyer then reach a deal.
The process then moves to the lender, who must approve the deal terms between the seller and prospective buyer. Refusal of the lender to agree to the deal means it can’t go through.
With a foreclosure, on the other hand, the lender initiates the process and often forcefully takes ownership of the property. They then attempt to sell it at a price close to the mortgage.
Benefits of a Short Sale to the Seller
Although the short sale is an option of last resort, it still offers some benefits.
- You Avoid Being Forcefully Sent out of Your Home
You’re initiating the property sale this time rather than the lender forcing you out.
- Retain Some Fair Credit Standing
Foreclosure’s level of damage to your credit report isn’t mild. For instance, it can prevent you from getting another mortgage for seven years.
- Save Lots of Money
Foreclosures are expensive for both lender and homeowner. A US Congressional Committee report notes that homeowners lose as much as $7,500 to legal fees on foreclosure proceedings. Banks lose much more.
Short sales save both parties the effort and resources.
- You Still Have Some Control
With a short sale, the homeowner still has a lot of say in the home sale process and even gets to negotiate with the buyer. However, in a foreclosure, lenders don’t give them any choice.
What Homeowners Should Know Before Deciding on a Short Sale
These are points to keep in mind during a short sale.
- The Lender Has to Approve Your Decision to Opt for a Short Sale
Having your mortgage repayment higher than the home’s value doesn’t mean you should automatically go for a short sale. You need to be qualified for it.
The essential qualification is proof of hardship due to lower earnings or other unforeseen circumstances. If your debt-to-income ratio has risen significantly, the lender may be inclined to approve.
- Look for the Best Ways to Sell the Property
You have the option of listing directly or going through an agent. However, you need to send any offers on the property to the lender for approval, which can take several months.
However, a strategy to significantly reduce the time frame is selling to a cash buyer.
The benefits of the cash buyer include:
- You get the best deals possible.
- You avoid lengthy and complicated negotiations.
- Finally, you present a solid deal to the lenders.
While there is a growing number of cash buyers out there, you can contact Florida Home Buyers. If you need the utmost convenience, the best pricing, and the fastest deal possible, Florida Home Buyers is the firm for you. They come over to your location for discussions, wherever you may be based. In addition, you can close the deal in as brief as 21 days.
- Short Sale will Affect Your Credit
While the impact of foreclosure is much worse, short sales still have a telling on your credit. They can take 75 to 150 points off your credit score. Additionally, lenders may deny you a mortgage for another two years.
Nonetheless, foreclosures will cause severe damage.
Tips for the Buyer in a Short Sale
There are also tips buyers should note as they work out a short sale:
- Exercise Patience
Short sales involve the buyer, the seller (homeowner), and the lender. Due to their bureaucracy, banks take considerable time to review the deal between the intending buyer and the homeowner. This can run into several weeks or months.
As such, there is a need for you to exercise patience.
- Be Prepared to Negotiate
Be prepared to see the bank countering whatever offer you have agreed with the homeowner. Banks always want a higher price since they’re already booking losses on the short sale.
A way around this is to get the homeowner to agree to a slightly lower price than what they originally proposed. Then, when the bank counters your offer, you can then suggest a price just above the initial offer.
- Get Your Financing Ready
It’s not just bureaucracy that delays the approval of a short sale agreement. Banks may be conducting due diligence on you. Securing finances before making an offer will increase the chances of getting the bank’s approval.
Cash financing is always the best. But if that’s not available, you should look into securing a healthy mortgage deal.
Short sales are often an option of last resort for most homeowners. Nonetheless, they help avoid a more dangerous outcome: foreclosure.
However, both buyers and sellers should have sufficient knowledge going into negotiations, which this article has provided.
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