What Is a Short Sale? How Do Short Sales Work?

In 2022, a staggering 324,237 homes faced foreclosure. This highlights the inability of homeowners to sustain mortgage payments. To avoid foreclosure and its negative impact on homeowner’s credit score, homeowners can opt for a short sale.

A short sale is a real estate transaction where a homeowner sells their property for less than the amount owed on their mortgage. Buyers may find short-sale homes attractive as they are cheaper. However, short-sale transactions are quite complex.

What Is a Short Sale on a Home?

A short sale is when a home is sold for less than the outstanding balance owed by the homeowner. Buyers can benefit from short-sale houses as they are priced lower than the current market value.

However, both buyers and homeowners should be prepared for a complicated and time-consuming process. 

When Do Short Sales Occur?

Short sales occur when homeowners can’t afford their mortgage payments due to financial distress. Such financial distress may include

• unemployment
• income dip
• medical expenses 

In such cases, a short sale becomes a viable solution. Instead of going through foreclosure, homeowners may opt for this alternative.

Difference Between Short Sale and Foreclosure

In both short sale and foreclosure, the homeowner struggles to make payments to the mortgage lender. However, the outcomes in these situations differ from each other.

• In short sales, homeowners sell the property for less than the remaining loan balance with the mortgage lender’s approval. The lender can either give a deficiency waiver judgment or require the homeowner to pay the deficit balance.
• A foreclosure is a legal process initiated by the lender when a homeowner defaults on mortgage payments. It ultimately leads to the seizure and sale of the house.

The consequences of a foreclosure include a far more severe impact on the homeowner’s credit score and financial stability.

✍️ Deficiency Waiver Judgment: The lender agrees not to pursue the borrower for the remaining debt despite the outstanding loan.

How Does a Short Sale Work For Buyers?

Here’s a comprehensive guide to help buyers navigate the process of purchasing a short-sale home.

1. Find a Short Sale Property: A real estate agent who specializes in short sales can help the buyer find suitable options.
2. Property Research: Once the property is shortlisted, it is essential to examine the property’s condition and its fair market value. The buyer can also gain valuable insights by understanding why the seller is pursuing a short sale.
3. Get Mortgage Pre-approval: Before making an offer, it’s crucial to get a mortgage pre-approval. This demonstrates to the seller and their lender that the buyer is committed and genuine.
4. Seller Acceptance: Once the buyer submits the offer, the seller may either accept it, reject it, or negotiate the terms. If accepted, the offer is then sent to their lender for approval.
5. Lender Approval: The seller’s lender will assess the offer and may also conduct a home appraisal. This process can take several weeks or even months. This provides an opportunity for the buyer to negotiate terms.
6. Due Diligence: While the lender’s approval is awaited, the buyer can arrange for a home inspection. Additionally, the buyer may also review seller disclosures and the property’s title history.
7. Ownership: Upon the lender’s approval, the buyer can finalize the purchase agreement, secure financing, and address any contingencies. Post which, the buyer officially takes possession of the property. 

How Does Short Sale Affect the Buyer?

Short sales can be quite beneficial as buyers can purchase properties at a discounted price. This way buyers can maximize their savings.

Home buyers can also negotiate with the seller’s lender for favorable terms. However, buyers must seek assistance from top real estate agents as a short sale is more complex than a regular home purchase.

Pros and Cons of a Short Sale For Buyers

Home buyers must carefully weigh the pros and cons of a short sale.

✅ Pros  

• Major Cost Savings: Homebuyers can benefit largely as the properties are often priced below the market value.
• Negotiation Power: As sellers are motivated to avoid foreclosure, buyers can negotiate favorable terms and conditions.

❌ Cons

• As-Is Home Condition: Short-sale homes are typically sold in “as-is” condition. This means the buyer may get a home with existing problems or needed repairs.
• Multiple Offers: Attractive short-sale properties may receive bidding. This may increase the buyer’s chance of losing out on a property.

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Pros and Cons of a Short Sale For Homeowners

Homeowners must assess the positive and negative aspects of a short sale.

✅ Pros 

• Avoid Foreclosure: With short sales, homeowners avoid foreclosure. This saves them from consequences on their credit score and ability to secure future loans.
• Faster Credit Score Recovery: Short sales typically result in a faster credit score recovery than foreclosures. This helps homeowners repair their credit scores and buy another home in the future.
• Debt Forgiveness: In some cases, lenders may forgive some or all of the outstanding debt on the mortgage. This provides relief for homeowners who struggle to make ends meet.

❌ Cons

• Lengthy Process: The mortgage lender may take months or even a year to approve a short sale.
• Negative Credit Score: It can negatively affect the homeowner’s credit score, although it’s generally less severe than a foreclosure.
• Payment of Balance Debt: The lender may still ask the homeowner to pay the difference between the sale price and the outstanding mortgage.
• Limited Negotiation Power: The significant negotiation power of the lender can limit the seller’s ability to get the best price for their home.
• Negative Impact on Future Homeownership: It may affect the homeowner’s ability to qualify for a mortgage or purchase another home for some time.

» How to Buy a House With Bad Credit: Here’s our guide on purchasing a home despite having a bad credit score!

What Mistakes Can Buyers Avoid in a Short Sale?

While buying a short-sale home, a buyer must avoid some common mistakes.

• Failure to Conduct Due Diligence: Failure to conduct thorough research of the property history and condition can lead to unpleasant surprises.
• Being Impatient: Short sales transactions can take a long time to close. An impatient and premature withdrawal from the process can be detrimental.
• Budget Underestimation: Buyers underestimate the add-on costs and should factor in repair costs, closing costs, and potential delays.
• Disregard Professional Guidance: Buyers must seek assistance from experienced real estate agents and real estate attorneys to effectively navigate the short sale process.
• Submit Low Offers: An unrealistically low ball price can lead the lender to reject the offer.

The Bottom Line: Is a Short Sale Home Right For You?

A short sale is a better alternative for homeowners to avoid foreclosures. Buyers also can take advantage of the low rate of such homes. However, both parties must consider the drawbacks before proceeding. 

A homeowner’s credit score may be negatively affected. While a buyer may acquire a lower-priced property with existing problems. Therefore, both parties must approach such a transaction cautiously with professional guidance.

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