A short sale occurs when a homeowner sells their property for less than what they owe on their mortgage. For sellers, it’s a way to avoid foreclosure if they can no longer afford their mortgage payments. For buyers, it’s a chance to purchase a home at a discount. Learn more about short sales and what they mean for both homebuyers and sellers.
A short sale is when a homeowner sells their home for a price that falls “short” of the outstanding loan amount owed to their mortgage lender . The lender uses the proceeds to cover the majority of the borrower’s mortgage balance when the house is sold. In some cases, the lender may forgive the remaining debt (known as the “deficiency”). Short sales can take up to six months to close.
A seller may consider a short sale if:
→ They are upside-down on their mortgage, can no longer afford their monthly payments and wish to avoid foreclosure .
A buyer may consider a short sale if:
→ They want to buy a home for a (potentially) lower price and are willing to deal with a longer closing process .
Short sales can occur when a homeowner is either behind on their mortgage payments or underwater on their mortgage, meaning they owe more on the loan than their home is worth. Though not as common as they were during the Great Recession of 2008, short sales do still occur.
One of the main drawbacks for homeowners is that they typically must wait two to four years after a short sale before buying another home with a conventional loan or FHA loan , while there often isn’t a waiting period for VA loans . However, your individual waiting period will vary depending on your credit history and lender.
Let’s say you owe $350,000 on your mortgage. 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.$350,000 – $275,000 = $75,000.
Your deficiency is $75,000. The lender will either forgive this amount or require you to pay the balance.
Both short sales and foreclosures involve a homeowner losing their property. However, a short sale is often seen as preferable to foreclosure for the following reasons:
Here’s what the short sale process may look like for homeowners:
Home purchase slider:
You may have part of your debt forgiven.
You may be able to get another mortgage faster than you would with a foreclosure.
You may still owe a balance after the short sale is complete.
Your credit will be damaged and may not fully recover for several years.
If you’re interested in buying a short sale home, here’s what the process may look like:
Sellers are more likely to offer concessions to speed up the sale.
Short sale homes may require fewer repairs than foreclosure properties.
You won’t be able to negotiate repair costs because short sales are sold “as-is.”
It can be challenging to find an experienced real estate agent.
A short sale may be worth considering if you’re upside-down on your mortgage, struggling to make your payments and don’t qualify for a loan modification or forbearance . However, if you have equity in your home, selling it through traditional means is typically the better option, since it allows you to walk away with proceeds from the sale.
Short sales can be appealing because they may offer an opportunity to buy a property at a lower price. Further, sellers are usually highly motivated to sell in these situations, which could lead to favorable terms or concessions.
Whether you’re a buyer or seller, it’s important to assess your specific situation and needs and understand the benefits and risks of short sales before making a decision.
A short sale isn’t the only option for homeowners struggling to make their payments. Some alternatives to consider include:
→ Loan modification. If you’re struggling with your mortgage payments, consider negotiating a loan modification with your lender. This may involve reducing your mortgage rate or extending your loan term to make your payments more manageable. Contact your lender to learn more about this option.
→ Refinancing. Replacing your existing mortgage with one that has better terms can help make your monthly payments more affordable. However, it can be challenging to qualify for a refinance if you’re already past-due on payments.
→ Deed in lieu of foreclosure. Another way to avoid foreclosure is to voluntarily transfer your home’s title to the lender — this is known as a deed in lieu of foreclosure . In exchange for handing the property over amicably, the lender releases you from your mortgage obligations. A deed-in-lieu will still damage your credit, but the impact isn’t as severe as a foreclosure.
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It depends on the lender . Once a bank receives an offer on a home, it can take several months for them to make a decision. When deciding whether to approve a short sale, a lender will review your financial situation to confirm that you’re unable to repay your mortgage.
A short sale can typically take anywhere from three to six months. The extended timeline may be due to the more in-depth negotiation and approval process, especially if you have a second mortgage .
A short sale can negatively affect your credit, though the exact impact depends on your overall credit history. Your mortgage account will show as “settled” on your credit report , and this mark can stay on your credit for up to seven years.
You may still owe money after a short sale. In some cases, the lender may take legal action against you to collect the remaining balance — this is called a deficiency judgment. Some states, including California and Nevada, prohibit deficiency judgments after short sales in specific circumstances.
