What is a Short Sale and How Does it Work?

If you are behind on your mortgage payments or underwater on your mortgage, a short sale can be an attractive alternative to foreclosure. However, there are complications and downsides you may want to consider.

A short sale occurs when a homeowner sells their home for an amount less than the full amount owed on the mortgage. But because a short sale is often undertaken as an alternative to foreclosure, the process can only begin with the approval of your mortgage lender. In some cases, your lender may even offer you an incentive to help you transition into more affordable housing.

Here’s what else you need to know about a short sale.

The Short Sale Process

There are several steps you must go through to complete a short sale, outlined below.

1. Submit a Hardship Letter: In this letter, you must explain to your lender or mortgage holder that you have a financial hardship that prevents you from making mortgage payments. As part of this submission, you will need to provide documentation such as bank statements, copies of bills and other expenses.
2. Hire a Real Estate Agent: Often called a listing agent, this person represents your interests and will play a significant role in the sale of your home.
3. List Your Home for Sale: Like a traditional sales process, you will wait for offers to come in.
4. Submit Offers to Your Lender: Unlike a traditional sales process, you will not be able to negotiate any offer on the property. Instead, your lender and any additional lienholders (that is, persons with a claim on the property) will negotiate on your behalf. Though you may like an offer, there is no guarantee your lender will accept, so this process may take some time.
5. Finalize the Sale: Once your lender agrees to the sales price, you may be required to pay the difference between that price and the remaining balance on your mortgage. For example, if you have $150,000 left on your mortgage, but your lender agrees to a short sale for $130,000, you may be required to repay the $20,000 difference.

The Benefits of a Short Sale

The main benefit of a short sale is foreclosure prevention. Your home will not go into foreclosure, allowing you to minimize negative impacts on your credit score. In addition, all or most of the debt you carry with your mortgage will be absorbed through the purchase of your home or forgiven by your lender.

The Drawbacks of a Short Sale

As with a foreclosure, a short sale will damage your credit — but not to the same degree. In a short sale, the seller forfeits all negotiation power on the sales price of the property and does not see any of the proceeds from the sale. In addition, you must complete a waiting period before qualifying for a new mortgage, which may  be anywhere from  2-7 years.