What is a Short Sale?
- Just as it sounds, short sale is selling real estate property short of the loan balance. Short sale is an alternative to foreclosure. Once a foreclosure judgement has been made, the homeowner no longer has options. But if he falls on hard times and contacts the lender before the foreclosure is complete, he and the lender can agree to sell the property short of the loan amount owed and part company.
- The homeowner, generally called the buyer in this process, contacts the lender and explains her hardships. Accepted practice is putting this information in the form of a letter along with a proposal for a short sale. The lender's loss mitigation department evaluates the proposal. If the borrower already has a buyer lined up, the process goes a little smoother. If not, the loss mitigation department follows the institution's pre-determined criteria to make a judgement on the proposal. Once the proposal is approved, the borrower sells the property to a buyer short of the loan owed.
- For banks this process is more ideal than a foreclosure because they at least get some of the money they are owed. The Illinois Law Group described on its website that it just makes good business sense for the bank. They avoid negative marks on their books and continue to look good to investors. A foreclosure will leave them with inventory, often called bank-owned properties, that they will have to use additional resources to manage and sell.
- The borrowers are able to reduce the damage to their credit report. Short sales appear as settlements on credit reports and some people are able to qualify for new mortgages in as little as three years. In the Foreclosure Survival Guide, Stephen Elias writes that this option "only makes sense if all the lenders are willing to let you off the hook for the deficiency." A few lenders will still require the borrower to pay the balance left on the loan after the sale. Borrowers can also be billed for receiving income from a home sale on their taxes.
- Fair Isaac Corporation, the company that produces FICO scores says on its website, that short sales will "be considered no better or worse for your FICO score" than a foreclosure. However, with continuous positive marks and longevity people have reported getting approved for new mortgages in as little as three years. National Association of Realtors reports that in times when homes are selling slowly, banks may be willing to offer new loans sooner.