You hear all the time about people picking up houses in a short sale, or avoiding foreclosure with one, but what actually does that mean?
Essentially, a short sale is when a homeowner in trouble sells their home for less than (or short of) the borrowed amount, with all proceeds going to the lender. That may not seem like a great idea, but short sales are one of the most popular alternatives to foreclosure. In some cases (but not all), the lender agrees to forgive the difference, giving the homeowner the ability to walk away with less credit damage.
How do I sell a short sale?
If you and your lender are out of options (like loan modification), then it may be time to convince your lender to agree to a short sale. They have no obligation to grant you one, so your best bet will be to demonstrate that your inability to pay is the result of recent unforeseen circumstances, like losing a job or getting sick. Lenders will be less forgiving in situations that could have been avoided.
Generally, you can submit your buyer’s offer and your request for a short sale (financial documentation included) all at once. This isn’t the time to try to go it alone. The process is complicated, so make sure you consult realtors and lawyers specialized in short sales.
Also keep in mind that while selling your home in a short sale has the potential to minimize damage, it won’t protect you completely. This, of course, will vary depending on your individual circumstances. For instance, if you’ve never missed a payment, then you’re going to be in better shape than someone who has. Also, how your lender or bank reports the short sale (“paid in full” vs “settled for less than full balance”) can impact your credit significantly.
How do I buy one?
Unlike a foreclosure or an REO (or real estate owned property), the bank has not yet taken possession of the home in a short sale, meaning that you will deal with the homeowners and their realtor, like in a normal sale.
Once you’ve decided to buy, though, the process can be trying. Often, you will find yourself waiting on a lender’s approval, and you may have to prepare for some additional back and forth.
On the plus side, you may be able to get a good deal for your trouble. Many short sales are priced to sell quickly. Be aware, though, that some of the warning people give about foreclosures apply to short sales as well. If the seller doesn’t have the money to pay their mortgage, they probably haven’t had the money for repairs and upkeep. That means that you may still need to do a little work