You Need to Understand What a Short Sale Is
If you are looking at homes and see one that is designated a real estate short sale you might inquire “what is a short sale?” A quick definition of a real estate short sale is when a lien holder to the property reduces the amount of the lien to accommodate a real estate transaction. A refusal of the lien holder to accommodate a short sale could likely result in foreclosure.
What Does a Short Sale Accomplish?
There are a number of homes that might seem to qualify for a short sale. A lender will only approve a short sale if only a true financial hardship is in existence. In addition, foreclosure of the property seems to the next step as a result. When a borrower has enough assets to pay the mortgage, a lender is not going to accept a short sale. A submission of documents to determine an approval for the lender’s short sale it then allows the property to be marketed to interested buyers. Now the property owner can accept bids to purchase the property. Typically these offers from the prospective buyers will be lower than the fair market value of the property. The borrower then decides to accept an offer on his property or not. Any offers the borrower approves are then submitted to the lender for acceptance. At this stage, the lender reviews the hardship of the borrower, reviews the borrower’s financial documents and determines acceptance of the amount derived from the sale of the property. Keep in mind that the mortgage lender is not approving the sale of the house. The lender is only acknowledging that the receipt from the property sale will be applied to settle the outstanding mortgage on the property.
The Drawback to the Borrower of a Short Sale.
The borrower will have financial impact in the future of the short sale acceptance. It is only reasonable to expect certain ramifications from a loan reduction. Foreclosure of the home would carry heavier consequences than a short sale.
Some of the more pertinent effects of a short sale on a borrower are:
1. An impact on a credit score of about 80 to 100 points
2. A 2 year wait before a borrower can obtain another mortgage
3. A possible deficiency judgment from the lender although this can usually be negotiated away with a professional negotiator.
4. Tax consequences for an investor property. Primary residences are exempt for debt forgiveness.
Does It Makes Sense for a Bank to Accept a Short Sale?
Mortgage lenders want to avoid foreclosures. Property holding is not what they are good at so short sales are a better alternative. The financial resources of a lender are compromised by a foreclosure. A lender could incur up to $30,000 in costs for a foreclosure. If the property becomes bank owned or an REO, then up to 6 times the value of the REO has to be held in cash reserves. This restricts the use of these monies, not allowing for better investments. One of the first jobs of an REO Officer is to liquidate properties acquired by foreclosure. Therefore, it is truly in the best interest of the lender to work out a short sale where permitted as opposed to going thru the foreclosure process.
What are some negative points in a short sale purchase of homes
Time for Approval – Short sales can take longer than a regular sale because they need to get approval by a third-party, which is the bank or mortgage holder. While the buyer can get a significant cost saving from the new home there are drawbacks. The approval process from the lender can be very long and frustrating. Other issues accompany the short sale. – Even with short sale approved properties, banks and lenders can still reject offers from buyers. Some of these causes could be buyer qualification, appraised value showing a large variance between offer price and appraised value, etc. Having an educated agent help buyers with the short sale process is important to make the transaction move forward toward a purchase. You can get more information about short sales from Homes in Palm Coast Florida.