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.  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.