Overview of a Short Sale

In these hard economic times the bank most likely will approve a short sale if the homeowner has fallen into economic or monetary destitution.  However, some of the banks have been playing hard ball.  They force you into default before even talking to you about a short sale or loan modification.  You do have the ability to start the process of short sale prior to your home falling into default, however, if someone accepted the offer on your home you do have the right to sell it but the bank does not have to accept the offer. If this is the case then you would have to come up with the differnce owed to the bank. In some cases the banks have given their blessing for a short sale, but have held the owner to the difference. This is why it is so important to get legal counsel.  If you have any questions after reading the article feel free to go to our  Contact Us page or press the banner to the right and fill out the form to receive your free consultation from a legal professional .  We suggest getting a qualified lawyer and a real estate agent in your area that understands how to handle short sales.  These two parties have had a lot of experience with banks over the past two years and with their help you may be able to be succesfful in your efforts to short sale your home and do it quicker than if you were trying to do it on your own. 

The purpose of this article is to give you the reader a basic overview of a short sale.  The homeowner should consider a short sale as an option because of all the advantages it offers over foreclosure and bankruptcy.  Some of these advantages are listed below.

  • It releases the mortgagee from their debt to the bank
  • A homeowner’s credit score is impacted less by a short sale than it is by filing bankruptcy or foreclosure
  • When the major credit companies (Equifax, Experian, and TransUnion) note it on your account it is classified as “pre-foreclosure in recovery” instead of “debt released because of foreclosure”.

When a homeowner chooses a short sale they will have to negotiate the sales price with the bank.  The borrower should try and negotiate the lowest possible selling price the bank will accept for their home.  Through negotiations the homeowner (you) and the bank (lender) will agree upon a price.  To begin the short sale process the borrower/homeowner will have to contact the loss mitigation department. 

Upon the sale of the home, via a short sale, the debt may or may not be fully fulfilled based upon the the negotiations between the borrower and lender. In many cases the homeowner may owe the bank a remaining balance.  To illustrate the short sale process we have created a scenario (see below).  In our example he homeowner “Johnny” owes $20,000 to the lender. 

Scenario:  Johnny has a home mortgage loan of $200,000.  He lost his job and has fallen into financial distress due to no fault of his own.  He decides his best option is to attempt a short sale.  He negotiates with his bank and they agreed to accept $170,000 for the sale of his home.  When he sells the home he will be released of any liability on the home mortgage loan above $170,000.  Johnny puts his home on the market for three months.

Result 1: The highest bid he received during the three month time period was $150,000.  Johnny chooses to sell his home for $150,000.  After the sale Johnny, per the terms of his agreement with the bank, owes the bank $20,000.  The $20,000 owed to the banks is the difference between the agreed upon sales price ($170,000) and the actual sales price ($150,000). 

Result 2: The highest bid he received during the three month time period was a $175,000.  He choose to sell his home for a $175,000.  After the sale Johnny owes the bank the additional $5,000 over the negotiated purchase price of the short sale.  This is due to his original mortgage loan being $200,000.  Therefore, the only way he would be able to keep any money from the sale of his home would be if he sold his home for more than the home mortgage balance.

Remember lending institutions are extremely interested in negotiating short sales especially if they believe you may be in danger of foreclosure.  They prefer short sales to a foreclosure because they avoid time consuming and expensive foreclosure trials.  Additionally, the market has most likely reached the lowest home and land value.  Market recovery time may not be reached for five to ten years.  Lenders understand any money recovered now is better than waiting for the money obtained through a lengthy court foreclosure.

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