Short Sale Explanation
A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold.
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's loss mitigation or workout department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower's financial situation.
A short sale typically is executed to prevent a home foreclosure, but the decision to proceed with a short sale is predicated on the most economic way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are carrying costs that are associated with a foreclosure. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from a Broker Price Opinion BPO (also known as a Broker Opinion of Value (BOV)) or through a valuation of an appraisal. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.
Short sales are common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense or is economically not feasible to retain an asset, businesses default on their loans (called bonds). It is not uncommon for business bonds to trade on the after-market for a small fraction of their face value in realization of the likelihood of these future defaults.
Summary Data on Short Sales
What should Homeowners who have challenges meeting mortgage payments do?
Homeowners having difficulty making their mortgage payments should talk to their mortgage servicer or a housing counselor as early as possible.The servicer may not be the same company that originated the homeowners mortgage. The servicer will work with their customers to find viable alternatives to foreclosure where possible. A servicer may own the loans they service and/or service the loans for investors so the ultimate decision as to what alternatives can be provided may not be up to the servicer.
Homeowner options include:
Why are there short sales?
Homeowners have an involuntary hardship and can no longer afford their monthly mortgage payments. The property is worth less than what is owed.
Short sale homeowner benefits:
Short Sale impacts
What else homeowners should be aware of:
What does the Sellers' REALTOR need to know:
What REALTORS need to know:
Common Short Sale Obstacles:
What can derail lender approval: