How Short Sales Work


Short Sales have become very popular in recent years with the downturn of the economy and many homeowners want to know how short sales work.  In this article I am gong to help you understand what a short sale is and how they typically work and what results you can expect.


What is a Short Sale

 A short sale takes place when the lender of a real estate note/loan agrees to take less than the value owed on the note if the property is able to be sold in a certain time frame.  This price agreement is agreed to up front by the lender and the borrower as well as the time frame for which the owner of the home has to sell the property in.  Short sales will typically negatively affect the borrower’s credit score, however to what degree, that depends on many other factors.  



How Short Sales Work

Each lender has their own criteria for determining whether a homeowner is a candidate for a short sale or not.  Each lender will qualify the homeowner through their own process which typically includes a financial statement, verification of documents and a hardship letter - noting why the homeowner is not able to make the payments on the property any longer.  Once a homeowner is qualified and seen as a candidate for a short sale, the lender will usually appraise the property and set a suggested selling price range.  The homeowner will be required to list their property with a licensed real estate agent at that time.  If there is an interested buyer, the buyer makes an offer to the selling real estate agent, which in turn communicates the offer to the lender.  If the lender accepts the offer, the property will be considered “under contract”.  Each state has their own language and applicable laws regarding contracts and escrow - please be sure to consult a real estate agent in your local area for updated regulations. 


Once the property closes and the new buyer takes possession of the home, the previous homeowner is released of their responsibilities for the home however not free and clear.  A short sale will still negatively affect the credit of the owner.  There are transactions and agreements between the lender and the homeowner that state when the property has closed the previous home owner is still liable for the remainder of the monies owed or a percentage.  This can be negotiated with the lender and should be in writing from the lender that when the property closes, the previous homeowner will not owe any more monies.  In fact, some lenders will offer to pay a bonus if the property sells within a certain time frame.



Results from a Short Sale

If the homeowner is able to successfully sell their home during a short sale process, they will receive a detraction to their credit score.  This detraction will not be as bad as it would be with a foreclosure or bankruptcy, however it will negatively impact credit.  However, to have been eligible for the short sale in the first place, the homeowner would have most likely stopped paying their mortgage and thus already have seen a negative impact on their credit score.  Try to see the short sale closing as a positive step and a move towards recovery.  The homeowner will have to move out of the home as they have given up their rights to the home just as in a normal home sale.  This will also require the homeowner to vacate the property



I hope this information has been helpful.  Best of luck on your short sale!