What is a short sale and how does it relate to the foreclosure process?
The term short sale has come up more and more in the real estate world as the real estate market has corrected to a more sustainable level of growth. The depreciation of home values in recent years has resulted in homes that are worth less than the mortgages that were used to finance the purchase. This situation, coupled with a national recession that has created the need for people to sell their homes despite being “submerged”, has led to the recent popularity of short sales.
What is an underwater loan?
A home loan or mortgage that is higher than the actual value of the home is said to be under water. In recent years, this situation has become a common occurrence, as homeowners who bought at peak home prices with little or no down payment have seen the value of their properties decline, sometimes dramatically. They started with a $ 300,000 loan on a house that was appraised around that value, and now their mortgage amount is roughly the same, but that same house is valued for less than $ 250,000.
With the rise in unemployment, many homeowners who have found themselves in this difficult situation have been forced to sell their home because they can no longer pay the mortgage. The problem that occurs is that even if the owner sold their home for $ 250,000, they would still owe the bank the additional $ 50,000, which delays the sale process. This hurts everyone involved because the original owners can’t pay the mortgage, so they don’t meet the loan. New buyers who are excited about the home cannot buy it at the new market price. Finally, the bank that holds the mortgage will not allow the original owner to sell, does not receive a payment each month for the mortgage, and now must go through a costly and time-consuming foreclosure process to obtain possession of a home that they will only be able to sell for. less anyway.
Buying and selling a home with a short sale
This is where short selling comes in. In a short sale, the original underwater homeowner will obtain an agreement from the bank to complete a short sale and put their home on the market at the current local price. When a buyer decides to buy the home, the bank agrees to allow the sale to take place and take a loss on the original mortgage. Ultimately, this type of legal arrangement allows the owner and the bank to avoid a costly and credit-damaging foreclosure process. The homeowner will still be impacted on their credit score and the bank will lose some money on the transaction, but the overall solution is much better than foreclosing on the house.
Foreclosures and short sales
Short sales are becoming more common with our current correction in home prices and high unemployment, but many bands still make the process very difficult for homeowners because they don’t want to take a loss on the loan. For this reason, many banks will not consider a short sale option until homeowners are several months behind on their mortgage. In addition, banks reserve the right not to accept the price offered by the new buyer for the home if they believe it is too low. This creates tension between all parties involved and, if not resolved, leads to eventual home foreclosure.