What is a Short Sale?

A short sale means a homeowner sells their home for less than they owe on the property. For example, a homeowner might owe $100,000 on the house but need to sell it for $70,000.

This is sometimes the only option for a homeowner because they:

  • Are able to avoid foreclosure on their record
  • May be able to find cheaper housing they can afford
  • May not need to come up with the shortfall, with approval from their mortgage company
  • Do not need to have the cash to cover closing costs like a typical home sale

The real estate is sold to a third party instead of a bank, and the mortgage lender takes all the money from the sale.

short sale typically leaves the mortgage company with less money than they loaned out. However, it is often the better option when a homeowner cannot afford payments because the mortgage company could receive nothing for the loan or receive part of the money back through a short sale.

When Do Short Sales Occur?

Typically, a short sale happens when someone faces missed or reduced mortgage payments and potential foreclosure. It is an option with most mortgage companies if you can no longer afford the mortgage on your home.

Generally, the home is purchased by a third party, like a new homeowner, and not the bank, which makes it different than a foreclosure.

Who Decides The Price of a Short Sale?

The owner of the home will need to negotiate a discounted sale price with the mortgage company. The homeowner does not make a profit or get any money back on the short sale, so the mortgage company will typically decide the sale price. They will try to recoup as much cost as they can.

Deficiency Judgments in Short Sales

Depending on the type of loan used for the mortgage, lenders may have the option to seek a deficiency judgment. This means they want the homeowner to pay back whatever money is lost between the home loan and the short sale price. In the example above, the $100,000 house sells for only $70,000, so the homeowner would owe the missing $30,000.

The deficiency judgment is a way for the mortgage company to demand this money back through the courts. It is a personal legal “judgment” against you. You are responsible for:

  • Getting a new loan to cover the money owed
  • Establishing a payment plan
  • Finding the money another way

If you do not pay it back, you can face debt collectors, high interest fees or fines. States have different time limits ranging from 30 days to 20 years to pay the judgment back.

About 14 states do not allow deficiency judgments or only allow them in specific circumstances. For example, read about Louisiana’s deficiency judgment law.

No Deficiency Judgment

If a mortgage company does not seek a deficiency judgment, the homeowner does not need to pay the cost difference. In this situation, the lender will try to minimize the financial loss they take by asking for a higher short sale price.

However, the mortgage company also understands that they can take the deal with the homeowner or risk not getting any money back at all for the home if it goes into foreclosure.

Does a Short Sale Stop Foreclosure?

Yes, when the short sale is final, the mortgage company will:

  • Say your debt on the mortgage is “satisfied”
  • Remove any liens on the property so a new buyer can purchase the home
  • Stop the foreclosure process
  • Not put a foreclosure on your record

Keep in mind that a lender will probably only agree to a short sale if:

  • The homeowner lists and actively markets the home to prospective buyers, for example by taking good photos, putting the home on real estate listing websites, or hiring a realtor.
  • The house is listed at fair market value at first. For example, you cannot list a $400,000 home at $200,000 just to get a fast sale. After considering the local housing market, a fair price might be more like $350,000.
  • The sale is an “arm’s length market transaction.” This means all the proceeds, after selling costs, are applied to the discounted mortgage payoff. For example, if you put a $450,000 house up for the fair price of $400,000 and someone offers $420,000, you do not pocket the profits of $20,000. The mortgage company takes all the money.

A Short Sale Requires Time and Cooperation

Many people need to cooperate during a short sale process. It is a complex transaction that requires careful coordination of:

  • Loan servicers
  • Mortgage borrowers
  • Appraisers
  • Homeowners
  • Buyers
  • Real estate agents
  • Title agencies
  • Mortgage insurance companies
  • Junior lien holders

Often, a short sale property is a good idea in certain circumstances. It often provides a better outcome for borrowers, investors, and communities, instead of letting the homeowner go into foreclosure. For the homeowner, avoiding foreclosure will help protect their credit score and mortgage debt.

The Downside of Short Sales

Due to the complexity of short sales, and the significant time required, these transactions can face challenges. Mortgage company servicers historically choose to pursue foreclosure instead.

The time and people needed to make a short sale work can prevent a short sale transaction even if it would have provided a substantially better outcome for everyone.

Short sales can be more popular during unique circumstances. For example, most lenders are more willing to make a reasonable short sale during financial and housing market crises.

Do I Qualify for a Short Sale?

You must be able to show specific criteria to sell a home in a short sale. You, as the mortgage owner or borrower, generally must be able to demonstrate:

  • You are unable to pay the mortgage
  • You are currently experiencing a financial hardship
  • There is an involuntary loss of income
  • There is a divorce, with one spouse in the home who cannot afford the mortgage payments
  • An injury or illness prevents you from paying the mortgage

These are all common financial hardship reasons to ask for a short sale. Explaining the reason to your lender is sometimes called a “hardship letter.”

Steps to Take Before a Short Sale

Some lenders require the homeowner to take certain steps before they can make a short sale:

  • Attempt to do a loan modification
  • Submit various forms and other documentation

These steps will help the lender determine whether you and your property qualify for a short sale.

The length of a short sale depends on your lender’s requirements and qualifying for special government-sponsored programs that focus on helping homeowners avoid foreclosure.

What Marketing Happens During Short Sale?

Marketing your short sale home can happen at the same time as the foreclosure process. This is called being in pre-foreclosure. While this is worrying to homeowners, no foreclosure sale can take place during this marketing period. The exact time frame will be specified in the short sale agreement.

As long as the homeowner is acting “in good faith” to sell the property, the foreclosure will not happen. There is a maximum marketing period of one year. This is to ensure servicers and borrowers move quickly to complete the short sale.

Can Any Property Be Sold as a Short Sale?

Any home can be sold as a short sale if the mortgage lender agrees to it. Typically, the house or homeowner also must clear:

  • Junior liens
  • Mortgages (this happens when you and the lender agree on a sale price and the home sells)
  • Other debts against the property

Once those items are cleared, the property can be sold as a short sale. In some cases, the short sale servicer can choose to proceed with a short sale before those items are cleared. They must have a reasonable belief that all liens on the property can be cleared to proceed.

Speak to an Experienced Real Estate Attorney Today

This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified real estate lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a local real estate attorney to discuss your specific legal situation.

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