An Alternative to Foreclosure - Short Sale
November 17th, 2007 categories: Real Estate Market
One alternative to foreclosure for homeowners is a short sale. Here’s a quick explanation:
What’s a short sale?
A lender agrees to accept a sale of a property for less than the mortgage owed plus the expenses for having a short sale (realtor, appraisal & attorney fees, e.g.). The lender may or may not absorb the entire loss - the lender may choose to go after the owner for all or some of the difference. And the lender will expect that the homeowner can prove that they can no longer afford payments - and that the inability to pay is a recent development, not that the homeowner lied on the loan application
Why should a seller consider a short sale?
A short sale is an option when foreclosure or bankruptcy are the other alternatives. A short sale is still a negative mark on a sellers’ credit but not as bad as either foreclosure or bankruptcy.
What are the downsides of a short sale?
If the lender absorbs the loss and allows the homeowner to walk away, the IRS looks at the value of that as taxable income. And as mentioned above, a short sale will affect the sellers’ credit. There is also the fact that the seller will not be able to stay in the home - it is a sale. And, a seller may still owe the lender money after the short sale.
How does a short sale occur?
A homeowner would contact their lender and if no other options are available (negotiating a different payment plan, e.g.), the lender may agree to a short sale instead of foreclosing. A lender may still choose to foreclose if foreclosure would result in a better outcome for the bank. However if they agree, the lender would then require the homeowner to sell the house. The homeowner hires an agent, who agrees to sell the house for a lower commission generally.
If a buyer can be found for the property, the buyer submits an offer to the seller who, if accepts the offer, then forwards the offer to the bank. The bank then either accepts the offer or does not depending on what the offer amount is and what the appraised value is determined to be, taking 4-6 weeks. If the lender accepts the offer, a closing usually takes place very quickly.
[…] 20, 2007 In my last post, I gave homeowners a quick explanation of short sales. This time, my post is for potential short sale […]
interesting concept, but can it be backed up with any hard numbers ? As in, how many CT banks have agreed to “short sale” contracts [for props in CT] in say, the past 3- 5 years ??
Short sale is an option if you do not want to live in the house any more, if you want to stay in the house and avoid foreclosure, there are a number of alternatives that are available to you. If you are thinking about a short sale and moving out of the house you can think about a a Deed in Lieu of Foreclosure as well.