The Benefits and Pitfalls of a Short Sale

The Benefits and Pitfalls of a Short Sale

When you’re in the market for a house, you might come across listings and properties that are labelled as “short sale.” This means that the person who’s currently mortgaging the house or property is forced to sell it for less than what they owe.

Let’s say that John has already taken out a mortgage of $400,000 on a house, and still has $350,000 left to pay. If for whatever reason, he is forced to sell the house for only $300,000, it would be considered a “short sale.” During this short sale, the money John makes from selling the house will, of course, not be enough to pay off the rest of the debt on it. Since he’ll be getting less than the amount he originally wanted, his mortgage lender will be losing money. This might make a short sale sound like a bad decision financially. However, in some cases, it might be John’s best option.

Why Short Sales Happen

A short sale will usually happen when a homeowner needs to sell their house because they can no longer afford to make the payments on it. The price they are able to sell the house for then ends up being less than the amount still owed. The lender is therefore forced to take a short sale and must accept a smaller amount for a property that’s actually worth more. This happens for the following reasons:

  • If the homeowner has more than one mortgage and can’t keep up with both payments.
  • If the homeowner can’t keep up with their current mortgage payments at all.
  • If the homeowner desires a change of location.
  • If the homeowner needs to avoid foreclosure on the house.

In most cases, a short sale occurs when the house is at the risk of foreclosure, which means that the homeowner isn’t making their mortgage payments anymore, the house is failing to be sold on the market, and there is the possibility that the homeowner’s bank is going to take possession of the mortgaged property.

The People Who Benefit From a Short Sale:

The Homeowner

A short sale sounds like a negative choice for a homeowner, because their house is selling at a loss, and they will not benefit financially from its sale at all. The one huge advantage for the homeowner is that their house will not be foreclosed on. The reason this is a positive thing is that a foreclosure can damage your credit score badly. So, a short sale can be a quick way method of selling your house and avoiding a costly decrease to your credit score.

The Mortgage Lender

While a short sale will indeed see that a homeowner’s mortgage lender will have to deal with a loss, it also allows that lender to avoid having to foreclose the property, which comes with a ton of headaches and other ramifications. Once the house is labelled as a short sale, they can simply resell it.

The New Home Buyer

A new home buyer can benefit greatly in the event of a short sale because it means the possibility of getting the house for lower, more reasonable price on the market. This usually depends on the circumstances of the real estate market at the time, as well as on the home itself. Short sales can vary based on a number of factors, like the way that the home was kept, and even the lender who granted the mortgage in the first place.

Other People

All the other parties involved can stand to benefit from a short sale. This includes the home buyer’s real estate agent, as well as any listing agents, appraisers, mortgage brokers and insurance companies.

Are You Thinking About a Short Sale?

If you’re having trouble deciding whether or not to list your home as a short sale, speak to your mortgage lender first, and see if it’s the right option for you. A homeowner must first get permission from their lender, bank or investors so that they can sell the home for less than the amount still left on the mortgage. That homeowner needs to get permission because the mortgage lender is now going to acquire a lot less money than the house is worth. It’s up to the lender to decide if the current homeowner is able to keep making their mortgage payments, or whether the benefits of a short sale outweigh the negative aspects of a foreclosure.

Also, it can take a lender weeks, if not months to assess the property completely. This is why it’s so important to speak to your mortgage lender as soon as possible if you’re considering a short sale. Keep in mind that you can also cancel the contract you’ve made on a short sale, in the event that your financial status should improve during the time of the assessment, and you make the decision not to sell after all.

So, if your home is in danger of being foreclosed, or you just need to sell the property because it’s wearing you down both financially and mentally, short sales are definitely not the worst option. Even though you could be getting a lot less than what your mortgage is valued at, it will still be much better for you, in the end, than a foreclosure that will certainly damage your credit rating.

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