A short sale is when a homeowner in financial distress sells their home for less than the mortgage on it, and gets the mortgage bank to erase the remaining loan balance. Let’s say Shawn owns a home that she has a $300,000 mortgage on, but after the housing crash, it’s only worth $250,000. A sale at the market value of $250,000, where the mortgage lender took the proceeds and said that they wiped out the $300,000 debt, would be a short sale.
Short Sales Are Bank-Friendly
Why would a homeowner do this? Well, Shawn might need to sell the house. (Maybe she’s been offered a job in another state). Or she might simply want to get out from under her house payments, and a short sale is an alternative to foreclosure … which is where the bank forcibly takes the house back and evicts Shawn. The mechanics are like a regular house sale, except that after the buyer and seller agree on a price, someone from the lending bank has to approve the transaction—which can take a while. Banks like short sales because they’re generally cheaper than foreclosures (they don’t have to pay the costs of evicting the homeowner, for starters). Also, unlike a foreclosure, where the homeowner often allows the property to get run down (thinking, hey, I’ll be outta here soon, it’s not my problem houses that are short-sold tend to be in better shape. But is it a good option for a seller in financial trouble?
They're Less Friendly For Buyers And Sellers
The complicated answer is “sometimes.” If Shawn wants out, and she can get the bank to approve a short sale, it will probably be faster than a foreclosure. A short sale may be gentler on her credit than a foreclosure, too, although that's not always the case. Before you start a short sale, you should talk to a credit counselor. Are short sales a good option for a buyer? Well, remember the joke about short sales is that they’re never short (see above about the need for bank approval), and they’re often not a sale. Even when you’re buying a house that claims to be a “bargain,” do your homework and make sure you know what it’s worth.
Tell us in the comments: Do you know anyone who has participated in a short sale? How did it turn out?