Understanding Short Sales

By

Michael Roussis

Michael Roussis

If you have been browsing homes for sale, you might have come across the term “short sale.” While it sounds quick, the truth is… short sales often involve several different moving parts. So, what exactly is a short sale, and when does it happen? Let’s break it down.

What Is a Short Sale?

A short sale happens when a homeowner sells their property for less than the amount he or she still owes on the mortgage, and the lender agrees to accept that reduced amount as full payment.

For example:

• A homeowner owes $250,000 on their mortgage.
• The market value of the home is only $200,000.
• The lender may agree to a sale of the home for $200,000 and forgive the remaining $50,000 debt.

Why Would a Homeowner Choose a Short Sale?

Short sales are often considered when a homeowner is:

• Facing financial hardship;
• Behind on mortgage payments;
• Unable to sell the home for enough to pay off the mortgage; and/or
• Hoping to avoid foreclosure

While it still impacts the homeowner’s credit, a short sale is usually less damaging than foreclosure and allows the homeowner to have more control over the process.

How a Short Sale Works

1. Seller Contacts the Lender

The homeowner must get the lender’s approval before listing the property as a short sale.

2. Seller Demonstrates Hardship

The seller must prove hardship – such as loss of income, medical expenses, or other financial challenges – to justify the short sale request.

3. Home is Listed for Sale

A real estate agent markets the property, often at a competitive price to attract buyers quickly.

4. Offer Submitted to the Lender

Even if the seller accepts an offer, it is not final until the lender reviews and approves it.

5. Closing

Once approved, the sale closes, and the lender receives the agreed-upon amount. The remaining mortgage balance is typically forgiven.

The Pros and Cons of a Short Sale for Sellers and Buyers

Pros for Sellers:

• Avoid foreclosure
• Possibly less damage to credit score compared to foreclosure
• Likely faster process than foreclosure

Cons for Sellers:

• Still impacts credit score
• Lender approval process can take months
• Not all lenders forgive the remaining debt automatically

Pros for Buyers:

• Opportunity to buy at a reduced price
• Negotiating with seller eager to close

Cons for Buyers:

• Lender approval process may prevent a quick closing
• Lender approval requirement reduces certainty of closing

The Bottom Line

A short sale can be a lifeline for sellers facing financial hardship and an opportunity for buyers willing to navigate a longer process. However, it is important to work with an experienced real estate professional who understands the complexities of short sales and can guide you every step of the way.