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Short Sale: What Is It And How Does The Process Work?

Breyden Kellam8-Minute Read
November 08, 2022

When faced with the threat of foreclosure, a short sale can be an appealing alternative for homeowners and lenders who are hoping to mitigate financial loss.

But while there are benefits to selling or buying a home through the short sale process, it’s important to also consider the drawbacks. Let’s take a closer look at what a short sale is and how the process works to see if it’s the right option for you.

What Is A Short Sale In Real Estate?

In real estate, the term “short sale” refers to the process in which a lender allows a borrower to sell their property for less than the amount they owe on the mortgage. As mentioned above, a short sale is usually done with the hope of avoiding a foreclosure — that is, when a property is seized by the lender because a borrower can no longer make mortgage payments.

While a short sale and foreclosure both require a homeowner to part with their home, a short sale is different in the sense that it is a voluntary process. It gives the homeowner an opportunity to proactively avoid the more negative consequences associated with foreclosure.

On the contrary, in a foreclosure the lender involuntarily takes ownership of the property and sells it to recover the amount still owed.

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How Does The Short Sale Process Work?

A short sale often involves many steps, making it a rather time-consuming process. So before entering into a short sale scenario, it’s essential to have a thorough understanding of how the process works.

Seller Asks For Lender’s Approval

Before a short sale can begin, a seller must obtain approval from their mortgage lender. A lender’s top priority is to recover as much of the remaining mortgage as possible. If a lender doesn’t believe a short sale is the best way to do so, they may not be willing to give their approval.

A lender will assess the seller’s financial situation to determine if a short sale is the best option. To ensure the best chance of getting a lender’s approval, a seller will need to show proof of financial hardship. They may consider writing a hardship letter explaining the reasons why they’re no longer able to make mortgage payments. Some possible reasons for hardship could be a reduction or loss of income, a long-term disability or serious illness, divorce, or another unexpected situation that’s caused an adverse financial effect. Depending on the specific situation, a seller may present this information before receiving an offer or after doing so — which we’ll explore a little later.

Buyers interested in purchasing a short sale home aren’t involved in this step of the process.

Buyer And Seller Find A Real Estate Agent

A seller and buyer in a short sale do well to consider enlisting the help of a real estate agent or REALTOR® who has experience with short sale transactions. An experienced agent likely has a wealth of knowledge that’ll make it easier to navigate what can often be a complicated and stressful process.

A well-chosen real estate professional can help you gather the necessary materials and take the lead in negotiating with your lender.  An agent can also keep the transaction moving forward by pricing the home in line with its estimated market value, marketing it to a broader audience, and evaluating potential offers for the lender to consider for approval.

Seller Decides On A Sale Price

Next, the seller will need to decide on an asking price for their short sale property. Some lenders may require their borrowers to accept the difference between their remaining mortgage balance and purchase price as taxable income after the short sale is completed.

As a prospective buyer, it is unlikely that you’ll be able to negotiate the price on a short sale home. Any buyer selling a home through a short sale will want to get as much as possible for the home, to make the difference between the sale price and what’s still owed on the mortgage as small as possible.

Buyer Views The Property

Once a seller decides on an asking price, interested buyers can now view the property. A buyer’s agent will be able to provide listings and schedule viewings. Since there is a greater chance that a short sale property purchase will be an  “as is” sale, it’s important to know what you’re getting before submitting an offer. Touring the short sale property will help buyers to do just that. Diligent buyers may even consider creating a checklist to determine what they’re looking for in a home, which may maximize the viewing experience.

Seller Accepts The Offer

After evaluating the property and securing the appropriate financing, a buyer is ready to make the short seller an offer. What happens once the seller accepts the offer is similar to the standard buying process. The listing agent will send the lender the listing agreement, an executed purchase offer, the buyer’s pre-approval letter and the seller’s short sale package.

However, just because the seller accepts an offer doesn’t mean the lender will approve it. Ultimately, the lender holds the power to approve or deny the offer.

Sellers Presents The Offer Package To Lender

As we discussed earlier, a lender will require proof of financial hardship before agreeing to a short sale. A short sale package is a set of financial documents that a seller uses to present their case to their lender. The lender will let the borrower know exactly what they expect this package to include. Usually, a borrower can expect to be asked for documentation of their current financial status including pay stubs, tax returns and bank statements, as well as anything that proves their current hardship, such as a termination letter, medical bills, a divorce decree or a death certificate.

A hardship letter — which we discussed earlier — will be an integral part of the offer package. The lender may also request information about the buyer such as a preapproval letter, a copy of the purchase contract and their earnest money deposit.

Buyer And Seller Wait For Lender’s Final Decision

Once the short sale package has been submitted, the buyer and seller must now wait for the lender’s decision before the process can move forward. It can take several months for the lender to review the proposal and decide whether to accept the offer, make a counteroffer or decline the proposal.

During the waiting period, the lender will likely assess if a short sale is the best option or if they should begin foreclosure proceedings. Buyers who are shopping for a short sale home must be prepared to wait with no clear closing date. The short sale process often has a less defined timeline and a more delayed response time than the standard home sale.

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The Pros And Cons Of Short Sale Homes

Before embarking on the journey of selling or buying a short sale property, you’ll want to consider the benefits and risks involved.

The Pros

  • Sellers can reduce the negative impact on their credit score by avoiding the foreclosure process.
  • The lender doesn’t have to go through the full foreclosure process.
  • The mortgagee might not have to pay back the full remaining balance if the lender decides to forgive the rest of the mortgage loan.
  • The seller might have lower closing costs compared to a normal sale.

The Cons

  • A short sale transaction can take much longer than a normal real estate transaction.
  • The seller’s lender might reject the short sale proposal.
  • The homeowner may struggle to cover mortgage payments during the lengthy short sale process.
  • The mortgage servicer might use a deficiency judgment to make the homeowner pay the rest of the loan after the short sale.
  • Buyers can’t negotiate the sale price with the sellers if the home inspection finds needed repairs if the home is sold “as is.”

Short Sale Alternatives

When a homeowner finds themselves with an excess of mortgage debt, a short sale can be quite an enticing option for loss mitigation. However, it isn’t the only option. There are two main alternatives that sellers can consider if a short sale doesn’t work out.

Foreclosure

Some homeowners may decide to let their lien holder foreclose on their house. A lien is a claim against any type of property that can be used as collateral in the event that a borrower can’t repay their debt. In this case, the home would serve as a collateral for the loan, allowing the lender to foreclose it.

Once the property has been foreclosed, the lender will try to sell it to recover the remaining mortgage. If you’re a buyer looking to purchase a home at an affordable price, you might consider buying a foreclosed home. You’ll want to be fully aware of how the process works and the potential drawbacks. Buying a foreclosed home may take a considerable amount of time and money. However, you still may find the risk worth taking because of the money you could potentially save.

Loan Modification

A loan modification is a change to the original conditions of your mortgage loan. If a homeowner is behind on their mortgage payments and can show evidence of hardship, a lender may be willing to adjust the terms of a loan — making it possible for a homeowner to keep their property.

FAQs About Short Sale Houses

Since the short sale process can be quite complex, it’s understandable if you have lingering questions about how it all works. Read on to learn the answers to these frequently asked questions about short sale homes.

How long does a short sale take?

It’s important to know that no short sale is created equal. Ultimately, the timeline is decided by the seller’s lender who has the power to accept or reject an offer. On average, it could take up to 120 days or more for a short sale to be completed.

What is the best way to find short sale homes?

If you’re interested in buying a short sale property but unsure of where to find feasible options, here are some avenues to consider.

  • Real estate agents: Real estate agents and REALTORS® with experience in short sale transactions have a wealth of knowledge that may help you find a potential deal on a short sale home. You may find it especially helpful to work with a REALTOR® who has earned the National Association of REALTORS’® Short Sales and Foreclosure Resource certification. With guidance from a trained professional in this type of sale, you’ll have the best chance at finding the best home for you.
  • Bank websites: Many homeowners often obtain mortgages from banks. For this reason, many bank websites offer a searchable database of properties for sale. Listings will typically include a few photos and the real estate’s contact information. If you’d like to make an offer on one of these properties, be sure to reach out to the agent or broker to discuss how your offer should be submitted and any other requirements to make the purchase.
  • Multiple listing service (MLS): A multiple listing service (MLS) is a database that aims to connect homebuyers to sellers by providing data about properties for sale. While MLS organizations are available to real estate brokers for a fee, a buyer with a broker who has access to a MLS will benefit from access to many short sale listings.

Can I finance the purchase of a short sale house?

Similar to a standard home sale, you can finance the purchase of a short sale house. However, you may encounter some issues when trying to obtain a loan for your short sale home. Because of potential delays in the process, some lenders won’t lock a buyer’s loan rate until the short sale is approved. If the interest rates fluctuate too much in that time frame, the borrower could potentially not qualify for their preferred rate or even the home itself.

The Bottom Line

It’s true that a short sale isn’t an ideal process. But it is a transaction that can help homeowners, lenders and possibly even buyers make the most of a financially challenging situation.

We know the home-buying experience can be stressful on your own, which is why we want to help. If you’re interested in buying a short sale home, take the first step by connecting with a Verified Partner Agent today!

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Breyden Kellam

Breyden Kellam is a writer covering topics on homeownership, finance, lifestyle and more. She is a graduate of the University of Michigan with a Bachelor of Arts degree in English. With a deep love for all things literary, Breyden is passionate about using her words to touch hearts and positively impact lives.