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With a short sale, the owner still deals with the buyer and has a standard closing, but with a foreclosure, the owner has little to no control over what happens. If second mortgage lenders or ‘junior lien holders’ are involved, delays may be stretched beyond endurance as they each need to buy into the deal. Sometimes it takes weeks or even months for a short sale offer to be accepted or rejected. Or the lender may make a counteroffer, in which case you can refuse, accept, or counter back — which involves restarting the process from square one.
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“A short sale is a scenario where the mortgage company approves a loan payoff that is short of—or less than—the full loan balance,” explains Misty Soldwisch, an experienced short sale agent in Des Moines, Iowa. Although there can be upsides to short sales, there are also many downsides and risks to be aware of, whether you’re the buyer or the seller. Below, you’ll find a list of pros and cons depending on which side of the short sale you’re on. You might be wondering, what’s a short sale like for everyone involved?
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“With a short sale, negotiations are between the homeowner and the purchaser, not the mortgage company,” explains Soldwisch. Let’s say someone can no longer afford their home because of an unforeseen event like job loss. On top of that, home values have plummeted where they live and they cannot get more than what their mortgage is worth from a prospective buyer. This is a scenario where someone might want to consider a short sale.
Step 5: Hardship Letter
If you’re part of that small minority, though, a short sale could prove helpful. If your lender or servicer agrees to a short sale, you may be able to sell your home to pay off your mortgage, even if the sale price or proceeds turn out to be less than the balance remaining on your mortgage. Once you accept an offer, you’ll submit it to your lender or servicer for review and approval. This process can take time, and the lender might not necessarily accept the initial offer price.
The lender will lose money, but it agrees to the sale of the property in order to avoid the foreclosure process, which could cost even more. Buying a home through a short sale is similar to buying a foreclosure, but the two processes aren’t the same. → You, the homeowner, benefit because you can avoid formal foreclosure’s negative effects on your finances and may have some portion of the debt forgiven. Still, how many points you’ll lose on your credit score largely depends on where your credit was prior to encountering financial problems.
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Keep in mind that not all short sales are due to an unexpected event like job loss. Short sales can also occur when a homeowner took on a mortgage and then realized it was more than they could handle—this happened frequently during the housing market crash in 2008. In order to need a short sale, a homeowner must have negative equity — meaning the home’s mortgage balance is higher than the property’s value. Although you could search for properties on your own using a Multiple Listing Service (MLS), it’s better to hire a real estate agent who is experienced in short sales. If you’ve hit a rough patch that has made it impossible for you to pay your debts, it may be prudent to consider bankruptcy. In other cases, though, you could still be on the hook for the deficiency.
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In real estate investing, it is said that the money is made in the buy. This means that a good purchase price is often the key to a successful deal. If you can get a property for a good price, you increase the odds of coming out ahead when it comes time to sell. If the purchase price is on the high end, on the other hand, you’ll watch your profit margin erode. Along with the documentation of your distressed financial status, your proposal should include a hardship letter explaining the circumstances that are preventing you from making your mortgage payments. You want to make it as convincing as possible and protect your interests while also appealing to the bank.
What Does A Short Sale Mean For The Buyer?
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In any case, the lender must approve the short sale, which means borrowers are sometimes at their whim. Short sales usually occur when a homeowner is in financial distress and has missed one or more mortgage payments. A short sale is usually a sign of a financially distressed homeowner who needs to sell the property before the lender seizes it in foreclosure. Arm’s-length transactions are any standard real estate transaction in which the buyer and seller don't know each other.
Short Sale Strategies for Buyers and Investors
Your lender agrees to a short sale, and because home prices have dropped since you bought the home, you’re unable to find a buyer who will pay more than $275,000. A short sale is likely the better short-term and long-term option for both you and your lender. While a short sale would be initiated by you with permission from your lender, a foreclosure is a legal action the lender takes to repossess your home if you’re not making payments on it.
If the lender files a deficiency judgment, you may be required to pay the remaining debt even after the house has been sold. While a few states — including California and Nevada — don’t allow deficiency judgments following a short sale, most do. Short sales aren’t nearly as common today, as just 3% of all mortgaged properties, or 1.6 million homes, had negative equity in the third quarter of 2020, according to CoreLogic, a property analytics firm.
You must be underwater on your mortgage in order to qualify for a short sale, which means that you have negative equity. Every time you open your mailbox, you’ve got stacks of collection notices from every creditor. You’re behind on the mortgage with no way to catch up, and now you’re facing foreclosure. Soon you’ll be out on the street with a big blot on your financial record.
If you are buying a house in a short sale with the intention of flipping it, the key to a profitable transaction is a good purchase price. When setting an asking price, make sure to factor the cost of selling the property into the total amount of money you need to get out of the sale. Of course, you want to sell the home for as close to the value of your mortgage as possible, but in a down market, there is bound to be a shortfall. Before the process can begin, the mortgage lender must sign off on a decision to execute a short sale, sometimes termed a pre-foreclosure sale. For those in Cincinnati needing to sell quickly due to unforeseen circumstances or personal choice, We Buy Houses Cincinnati offers a seamless solution.
If the seller asks you to pay money under the table for the opportunity to apply for a short sale, refuse and report it. However, in a short sale, the transaction is in the hands of the lender, so the process tends to be more time-consuming and convoluted. The following six steps illustrate the primary differences between a short sale and a traditional sale. In a foreclosure, the lender initiates the process, seizing the home and, if necessary, evicting the owner who has failed to make payments. The foreclosure process is generally faster than a short sale, as the lender seeks to liquidate the asset as quickly as possible.
In that case, you can ask the lender to "waive the deficiency" before proceeding with the short sale. Get the waiver in writing, advises the Consumer Financial Protection Bureau. The transaction requires the lender's approval and is a last resort to avoid foreclosure when a homeowner can no longer afford to make mortgage payments. Although the short sale property will be priced according to market value, the lender is highly motivated to sell in order to cut the bank’s losses.
In a short sale, the borrower still has ownership and legal rights to sell the property. They can also request a short sale from their lender without having missed any payments on their mortgage. Sellers typically must craft a hardship letter to their lender that explains their financial situation and their desire for a short sale. They also must list any other liens against the property, such as home equity loans or home equity lines of credit (HELOCs).
Don't assume that the home seller is behind on their mortgage when they've listed their home as a short sale. Once the buyer and seller have come to an agreement the next step is submitting a proposal to the bank for approval of the short sale. There are benefits to short sales for the seller, the buyer and the mortgage lender. The appeal for the seller is that they’re able to avoid foreclosure and get out of a situation in which they’re paying a mortgage that’s worth more than their property, Leibowitz said. The appeal for the lender is that they’ll avoid foreclosure, which can be expensive—plus they’ll avoid owning a house. The appeal for buyers is that they could snag a home at a great price.
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