Whether you are buying or selling, the prospect of a short sale can be cheering in the current real estate market. For buyers, a short sale offers the opportunity to get a great deal on a home purchase. For a seller, the short sale offers the opportunity to unload a home that has been difficult to sell at a price that would mean the discharge of the remaining balance on the mortgage.
The current market has led to an increase in the number of short sales performed, and, consequently, the interest in short sales has likewise increased. While a short sale can provide opportunities for buyers and sellers, it’s important to realize that not all short sales go through. Whether you are looking to buy, or hoping to sell, here are some things you need to understand about short sales:
Before you get excited about a short sale, it’s vital that you understand that the bank is in charge of the transaction. As the lender — and the party that stands to lose the most from a short sale — the bank decides whether or not the short sale goes through. It’s important to remember that the mortgage lender likely has more true ownership in your home than you do. And, since it’s the bank’s money at risk, the bank decides whether or not to allow the short sale.
This approval process includes lenders that have provided you with a second mortgage as well. If there are more banks with a claim on the home, then the likelihood of being approved for a short sale goes down. It’s true that other lien holders have less of a claim than a primary mortgage lender, but there is still veto power. If a lender thinks that there won’t be much left over, the short sale may not be approved.
In order for a seller to receive approval for a short sale, he or she must prove that the house won’t likely sell at a price that pays off the mortgage, and that there is financial hardship involved. Potential buyers should find out whether a home listed as a “short sale” already has approval from the bank before proceeding. If the homeowner hasn’t received approval — or even submitted a package — you could be wasting your time hoping the short sale goes through later.
Before you go down this roard, realize that the entire process could take several months to complete.
Normally, if a seller decides to sell a home for less than what is owed, he or she is required to make up the difference. If the bank approves a short sale, though, the remaining amount owed is forgiven (remember that the IRS views this as income, and the seller will need to pay taxes on it). Before the seller is approved, though, there are some hoops to jump through. Normally, in order for a bank to agree to a short sale, the following conditions have to be met:
Because there is so much involved, many short sales never go through. It’s hard to close on short sales because the bank has to be willing to lose the money. However, in some cases, the short sale does turn out to work well. If the bank doesn’t want to deal with the short sale, it’s possible that it can be approved. Sellers, though, need to be upfront with the bank, and get approval before trying to sell their home under those circumstances. Buyers should discover the situation early on to avoid an unpleasant surprise later.
Photo from Wikimedia Commons.
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