A short sale is a process in the real estate industry where a homeowner decides to sell their home before completing mortgage payments on the property. A homeowner may forfeit ownership of property due to financial inability to continue making monthly mortgage payments to the lender. Alternatively, the homeowner may stop making mortgage payments if the outstanding mortgage is higher than the value of the home after a decrease in the value of a home.
How it works
The truth is that the decision to go through with a short sale is ultimately made by the lender, not the homeowner. As such, it is the homeowner’s job to convince the lender to allow such a sale to happen. When you realize that you will no longer be able to make mortgage payments, you should notify the lender. This may prevent the house from being foreclosed and it may also save your credit score from a bad reputation.
A lender may opt to foreclose a home where the lender is not making mortgage payments in order to recover the outstanding mortgage amount. However, foreclosures involve a rigorous process of reporting the default payments, giving notice to the owner, pre-foreclosure, home auction, and bank ownership of the property if it fails to sell in the auction. The foreclosure process is time-consuming and expensive hence the lender may allow a short sale of the home in order to recover part of the outstanding mortgage.
The homeowner needs to provide proof of financial strain by submitting bank statements and financial records that indicate income, assets, and expenses. In the case of a depreciating real estate market, the homeowner needs to submit a Comparative Market Analysis (CMA) to the lender. You can get a CMA from your real estate agent, which shows the current prices of similar homes to yours in the market and the selling price of homes in the last 6 months in order to indicate a decline.
Substantial proof may convince the lender to allow the short sale. When the home is listed as a short sale and a potential buyer who seeks to close on the home comes along, the following documents will be sent to your lender:
- The purchase offer
- The listing agreement
- The buyer’s letter of mortgage pre-approval
- A copy of the earnest money check
The lender may accept or reject the offer hence the homeowner should be ready for negotiations. Short sales tend to tend a lot of time before the deal is closed because the lender seeks to evaluate whether the home can get more money through a foreclosure. The homeowner may convince the lender not to report the unpaid mortgage especially if the owner came up with the short sale proposal. This will save the homeowner’s credit score and prevent penalties that may prevent another home purchase in the future.