Definition of a Short Sale
A short sale differs greatly from a foreclosure. Simply stated, a short sale is when an owner makes an agreement with the lender to sell the house for less than the mortgage is worth. However, because the sale price does not compensate for the seller’s entire mortgage, the seller’s credit will suffer and they may also be susceptible to tax consequences. In addition, short sales require that the lender accept the buyer’s offer as opposed to in a normal sale where the seller accepts the buyer’s offer.
Short Sale Process
The first factor in a short sale is that the market value of the property must be less than the total of the mortgages and liens. This is usually demonstrated through missed mortgage payments. Once this qualification is met, the lender has to agree to discount the balance of the mortgage due to a borrower’s financial hardship. The property owner is then allowed to work with a real estate agent to sell the property for less than the balance of the mortgage. The real estate agent will list the property in the Multiple Listing Service also commonly known as the MLS. When the agent finds a buyer, the seller must be willing to move forward with their offer and the then next step is in the hands of the lender. Unlike normal property sales, in a short sale, the owner’s lender must approve the buyer’s offer through a review of all transaction documents. If the offer is approved, the transaction will close and the seller will not receive any monetary compensation.
The length of the short sale process depends largely on the seller. From the time that a seller is willing to move forward with an offer, the process can take on average anywhere from three to six months. Unlike popular belief, the time frame does not depend on the lender’s loss litigation department. The seller is largely responsible for the speed of the process. If the seller actively participates in providing timely and complete documentation to the loss litigation department, the short sale process will move much quicker.
Credit Implications of doing a Short Sale
While banks incur a small loss from a short sale, the sellers’ credit implications can vary greatly. It has been reported that on average, your credit score will reduce anywhere from 30 to 300 points after a short sale. While a short sale will appear on public record, the good news is that it may be reported as “paid-settled,” which is less negative than the alternative of “pre-foreclosure in redemption.” The difference in severity is whether or not the seller missed mortgage payments.
Additional implications include the ability to secure future loans. For instance, if you go through the short sale process and would like to purchase a new home, you have to wait a minimum of two years if you want an FHA loan. There are loan types with no time requirements, but you will most likely have a higher interest rate.
Our Experience with Short Sales
The team at Miami Condo Investments is here to guide you through the short sale process. In our experience, we have seen that on average it takes anywhere between three and six months to receive a response from the bank after an offer has been submitted on an unapproved short sale. As previously noted, the time frame depends on the loss litigation department, but also on the accuracy of the paperwork that the seller has submitted to the bank. When buyers work with a Realtor® in purchasing a short sale, they have the comfort of knowing that the title of the property they purchased is free and clear.