But one common misconception is that lenders just want to be rid of the property and will move quickly to get as much money back as possible. In reality, the lender will take their time to recover as much of their loss as they can. Neither a short sale nor a foreclosure is an easy way out for sellers who want to be rid of their home mortgage.
In a short sale, the homeowner initiates the sale of their house. Potential buyers will deal with the home sellers during the short sale process, but all of the details around the process must be reviewed and approved by the lender. The short sale cannot happen unless the lender approves it. Because everything is dependent on the lender, the short sale process can be lengthy and unpredictable—even if the homeowner and the potential buyer agree on terms.
On the other hand, in a foreclosure situation , the bank takes ownership of the home after the buyer is unable to make payments. This process is initiated by the lender. The lender will force the sale of the home in order to try to recover as close to the original loan amount as possible. Most foreclosed homes have already been abandoned, but if the homeowners are still living in the house, the lender will evict them during the foreclosure process.
The lender will then attempt to sell the property either through an auction or through a real estate agent. The foreclosure process typically takes less time than a short sale because the lender is trying to liquidate the home as quickly as possible. For homeowners, a short sale is typically preferable to a foreclosure for two reasons. First, a short sale is voluntary while a foreclosure is forced.
Secondly, after a foreclosure, most people are required to wait a standard seven years before obtaining another mortgage loan while a short sale may cause you to wait for at least two years. Most lenders would prefer a short sale to a foreclosure process because it allows them to recoup as much of the original loan as possible without a costly legal process.
In fact, in most cases a homeowner and lender will only pursue a foreclosure after an attempt to sell the home through a short sale process. Step 1: The homeowner starts by talking to their lender and a real estate agent about the likelihood of selling their house via short sale.
At this point, they may submit a short sale package to their lender. Step 2: The homeowner works with a real estate agent to list the property. Step 3: The lender reviews the contract and could then respond in a variety of ways. Here are some questions to ask yourself before you invest your time in a short-sale property:.
If you have any doubts after answering these questions, a short sale may not be the best fit for you. With a lower mortgage rate, you can save a bunch of money over the course of your home loan. Credible makes it easy to find a competitive rate. With Credible, you can compare personalized prequalified rates from all of our partner lenders — and it only takes a few minutes.
Advertiser Disclosure. How short sales work How long does a short sale take? Pros and cons of buying through a short sale How to buy a short sale home in 6 steps Is a short sale home right for you? What is a short sale? Short sale vs. Here are some of the key differences: As the homeowner, you initiate a short sale by choice, whereas a foreclosure is imposed by the lender. Short sale Foreclosure Who initiates?
Homeowner Lender Time to complete Varies by lender; can take many months Approximately four to 10 months for uncontested foreclosure, depending on lender Affects credit score? Yes Yes Deficiency judgment Varies by state; lender can waive right to deficiency Some states allow lenders to get a deficiency judgment in judicial foreclosures, but not in nonjudicial foreclosures.
Tax consequences? Yes, if the lender forgives the deficit Yes, if the lender forgives the deficit How short sales work To kick off the short sale process, you or your listing agent must contact your lender to get permission to sell the home for less money than you need to pay off the mortgage.
How long does a short sale take? Seller delays: If the seller is slow to submit their documentation to the lender, or the documentation is incomplete, the sale will be delayed.
Offers submitted: Lenders only consider one offer at a time. If your sale is contingent on one currently under review falling through, you could be in for a lengthy wait. Number of lienholders : A seller who has additional liens, such as from a second mortgage or unpaid homeowner association dues, must get all the lienholders to sign off after the primary lienholder approves the sale. To give you a sense of how long that might take, note that the standard short sale addendum used in New Jersey allows up to 90 days for these additional approvals.
Here are the advantages and drawbacks to consider before buying a short sale home: Pros Cons Potential to get a great deal on a home. To avoid foreclosure, the seller needs to sell the home quickly. Can take a long time. The waiting period to receive short sale approval could take months.
Home is likely to be in better condition. A homeowner in foreclosure has nothing to lose by letting the home fall into disrepair. With a short sale, the homeowner wants to sell before the lender forecloses, for a price the lender will accept, and that means the home must be in good shape.
One of these options might allow you to stay in your home and get back on your feet. Another possible option for staying in your home arises if you have private mortgage insurance PMI. If the PMI company thinks you have a chance at recovering from your current financial situation, it may advance funds to your lender to bring your payments up to date.
The source of the financial trouble should be new, such as a health problem, the loss of a job, or a divorce, rather than something that was not disclosed when the homebuyer originally applied for the loan. However, if you feel you were a victim of predatory lending practices, you may be able to talk the lender into a short sale even if you have not had any major financial catastrophes since purchasing the home.
To put yourself in a more convincing position to complete a short sale, stop purchasing non-necessities. Be aware of other circumstances that may prevent the approval of a short sale.
If the lender thinks it can get more money from foreclosing on your home than from allowing a short sale, it may not allow one. If someone cosigned the mortgage, the lender may hold that person responsible for payment rather than doing a short sale.
If you think your situation is ripe for a short sale, talk to a decision-maker at the bank about the possibility of engaging in this type of transaction. At this point, you should consult an attorney, a tax professional, and a real estate agent. While these are high-priced professional services, if you make a mistake by trying to handle a complex short-sale transaction yourself, you may find yourself in even bigger financial trouble.
You may be able to pay for these service fees out of the sale proceeds from your home. Professionals accustomed to dealing with short-sale transactions will be able to give you guidance on how to pay them. 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 situation. 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.
In some states, even after a short sale, the bank will expect you to pay back all or part of that shortfall. These may include bank statements , medical bills, pay stubs, a termination notice from your former job, or a divorce decree.
It is up to you to come up with a proposal. Be aware that the lender ultimately must approve a short sale after receiving all the details because the lender is the recipient of the proceeds. Your job is to find a buyer for your home. 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. Be careful about submitting your financial information to a lender because, if it does not approve the short sale, it may use your financial information to try to get money out of you in foreclosure proceedings. If you still have cash assets , you may be expected to use them to continue making mortgage payments or to make up some of the shortfalls between the sale price and the mortgage amount.
An attorney experienced in completing short sales can help you navigate the details. Because short sales can take longer than regular home sales due to the need for lender approval, they often fall through. The buyer may find another property while waiting for an answer from you. Be prepared for this possibility. If the short-sale transaction goes through, consult with the Internal Revenue Service IRS to see if you will have to pay taxes on the shortfall. Also, be aware that a short sale can still affect your credit score in the sense that the months of mortgage payments you missed prior to the short sale can show up as delinquent payments on your credit report.
Your bank may be more likely to be generous in this regard if you brought up your hardship before you were significantly behind. For credit purposes, while this is somewhat damaging, it is certainly less damaging than a foreclosure.
Short sales can also provide excellent opportunities for buyers to get into houses at a reduced price. Here are a couple of tips to help you make smart decisions when considering the purchase of a short-sale property. Most short-sale properties are listed by real estate agents and on real estate websites. Some listings may not be advertised as short sales, so you might have to look for clues within the listing, such as being subject to bank approval or giving the bank time to respond.
An experienced real estate agent can make a big difference in terms of both finding and closing short-sale properties. Holders of this certification have received specialized training in short sales and foreclosures, qualifying sellers for short sales, negotiating with lenders, and protecting buyers.
Realize in advance that short sales are complicated, time-consuming transactions. It can take weeks or months for a lender to approve a short sale and many buyers who submit an offer end up canceling because the short-sale process takes too long. Rules for short-sale transactions vary from state to state, but the steps normally include:. 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.
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.
You should be able to buy the property, put it in great condition, and sell it at a price where you can still make a profit. Investors need to be able to turn around and sell the house quickly—typically at below-market—and a good purchase price makes this possible. The purchase price is only one important number, however.
Costs to consider include material, labor, permits, inspection fees, trash removal, storage costs, and dumpster rentals. A good inspection before making the purchase can alert you to any large expenses, such as a cracked foundation, faulty wiring, or extensive termite damage. Investors look at this number to determine whether a property has profit potential. These are homes that have recently sold in the area typically up to a mile away from the subject property that have similar features in terms of square footage, such as the number of bedrooms and bathrooms.
Carrying costs are your expenses for holding onto the property. The longer you own the property, the more you will spend on carrying costs, which include:. In order for an investment to be profitable, the sum of your costs the purchase price, repair and renovation costs, and carrying costs must be lower than the ARV.
If your costs are close to or higher than the ARV, it will be difficult or impossible to make a profit. You can determine the potential profit by subtracting the purchase price, repair and renovation costs, and carrying costs from the ARV:. Under these guidelines, total investment purchase price, repair and renovation costs, and carrying costs should not exceed:. The various investment levels are used to reduce risk in changing market conditions.
You can risk more in a rising market because you are more likely to get your ARV or better when you sell. In a falling market, you are less likely to get your ARV, so your investment should be smaller.
In real estate, a short sale takes place when an owner sells their house below its mortgage value. This typically happens when the owner is under financial distress and is behind on mortgage payments.
The owner is obligated to sell their home to a third party, while the proceeds of the sale go to the lender.
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