When home owners get into trouble with their mortgage, among the variety of options that may be considered is the short sale. In this case, short does not refer to the length of time involved in the selling process. It has to do with selling the house for less than is owed to the lender. Specifically, a house is said to be sold short when the lender agrees to let the owner sell the house for an agreed upon price that the lender will accept as payment in full.
Banks sell foreclosed houses short all of the time to clear bad debt from their books.
Houses that are sold for less than the mortgage amount by the lender are technically not usually referred to as a short sale. Because the bank has already foreclosed, it has decided that the debt is to be written off. Selling those properties are a way of putting some of the money back into the bank coffers. Sometimes, the bank will still go after the borrower if it believes they have enough financial resources to be worthwhile. Most of the time, the bank just takes the hit and moves on.
As a property owner, never decide to sell short without discussing it with the lender.
Most of the time when a buyer decides to default on a home loan, it is because the value of the house is near the value of the mortgage. Very few people will walk away from a property that has a great deal of equity. In these cases, the owner can sell the house for less than its value, retire the note, and still have some cash left. When an owner starts to default on a loan, the bank will begin to move toward foreclosure. If the seller tries to unload the house in a short sale, the seller will still owe the difference to the bank. By discussing a short sale with the bank first, several good things can happen. The bank may grant a period of time with a reduced payment or no payment and just accrue the interest until the sale can be completed. Often, the bank figures that anything that the property owner pays during this time is just less to lose. They will also spell out the conditions of the type of short sale they will agree to allow.
Banks will sometimes agree to a short sale to prevent having to foreclose.
Most lenders will go a long way to try to keep a customer from vacating a house and allowing it to be foreclosed. If banks can keep the owner in the property, they stand a much better chance of getting their principle back with at least some interest. If the bank forecloses, it will almost always lose principle and will also lose interest during the time that is required to sell the property. Because of this, banks will sometimes work with the borrower to arrange a short sale without having to go through the agony of a foreclosure before losing money on the property anyway. The problem is that they do not have to agree to this, and if a buyer asks for too much in the offer, the bank will just turn it down and move on to foreclosure.
Getting the short sale wrapped up can take a considerable amount of time.
If the owner has not been able to keep up with repairs and maintenance on the property, it can be hard to find a buyer and a new lender that are willing to take the risk. Even if a buyer is found, it can be tricky having to involve the bank in the negotiating process of the sale. Instead of taking a few hours or days, it can drag into weeks before the final selling price can be reached. The cost of holding on to the house until closing can be quite high for the current owner if the bank has not offered a significant reduction of the payment during the sales process. All concessions and repairs agreed to in the contract will probably be the owner’s responsibility. It can turn out to be a bad deal for the home owner if care is not taken to prevent it.
A short sale can still ding your credit history almost as bad as a foreclosure.
Unless the bank is willing to not report the short sale to the credit bureaus, you will have to deal with damaged credit for a few years after the short sale is finalized. This type of transaction can appear on your history much in the same way as a settlement with a credit card company. If you are already dealing with weak credit in other areas, you might find it to be better to just let the foreclosure happen. The money that you spend trying to sell the house and make payments to the bank during the sales process might be enough to straighten out other issues with your credit.