Understanding a Short Sale
If you are new to the world of real estate, you may have heard the term “short sale” come up in conversation. For those unfamiliar with how this process works, we’ve compiled a helpful explanation below. Read more to find out what a short sale is and what it means for the real estate market.
What is a Short Sale?
In the simplest terms, a short sale is a real estate transaction that takes place when a homeowner sells their property for less than the amount they owe on their mortgage. You may be wondering why a seller would intentionally lose money on their investment. The usual reason for a short sale is that the seller is in a place of financial distress. There is usually a financial reason for the seller to want to get out of their mortgage and short sale their home as quickly as possible.
Is a Short Sale the same thing as a Foreclosure?
Great question! No, a short sale is not the same concept as a foreclosure. If a homeowner is considering a short sale or a foreclosure, they are certainly in financial strain and likely behind on their mortgage payments. The difference between the two is that in a foreclosure, the lender will seize the property from the owner and force a sale to get back the money they lost on the transaction. There is more wiggle room in a short sale for the homeowner to list and sell the property, then buy another home that is more suitable to their budget.
What does a Short Sale look like in real life?
To better explain how a short sale works, let’s use a “real life” scenario. Say a homeowner owes $100,000 on their existing mortgage. If the homeowner lists and sells their property for $90,000 to make a quick sale, then they still owe their lender $10,000. This is a short sale and the deficiency is $10,000. The lender always needs to sign off on a short sale before it happens, and usually they will need to come to an agreement about the deficiency amount.
How does a Short Sale affect a homeowner’s credit?
While every case is different, usually a short sale has less of an effect on a homeowner’s credit than a bankruptcy or foreclosure. However, it will have some kind of impact on a homeowner’s credit score. This is part of the reason why homeowner’s in dire financial stress turn to the option of a short sale.
What happens after a Short Sale?
Once a seller finds a buyer to make their short sale happen, then all the proceeds from the sale go to the lender (usually a bank) and not the seller. The lender then has the option to forgive the remaining balance on the mortgage, or they can go after the homeowner with a deficiency judgement. This would require the seller to pay back all or part of the difference.
If you have additional questions about short sales and how they work, the right real estate professional can explain how it works in more detail. If you are looking for a real estate agent who knows the Baltimore area and can help you explore your options, I’d love to meet with you. Reach out to me through my website or give me a call at (302) 545-8569, and follow my blog for more home buying tips!