Understanding Short Sales

Given the current state of the economy, you may be hearing the term "short sale" thrown around a whole lot more than it used to be. In fact, many people never even heard the term prior to the economic downfall. Still, even if you have been frequently hearing the term, you still may be unfamiliar with this procedure as well as its pros and cons. Although there are many details and steps involved with completing a short sale, here is a look at a few of the basics that you should understand if you are considering selling or buying a home on a short sale.

What is a Short Sale?

A short sale occurs when the homeowner owes more on the home than what it is currently valued at. Therefore, if the person were to attempt to sell the home, he or she would not be able to get enough to cover the loan on the home. For those who have fallen behind on their payments and who owe more than the home's value, the lender may be willing to negotiate a "short sale." In this case, the lender absorbs the amount of the loan that the seller cannot recover from the sell.

Why Would a Lender be Willing to Negotiate a Short Sale?

Lenders are sometimes willing to negotiate a short sale because accepting partial payment for the home is better than having to foreclose upon the home. Not only does a foreclosure result in a whole lot of extra paperwork, fees and headaches, but the lender will likely get less money out of a foreclosed home than it can get from a short sale. At the same time, a short sale does ultimately result in the lender losing money in the deal. Therefore, getting a lender to agree to a short sale can be difficult and, in most cases, a seller will not be willing to negotiate a short sale unless the seller is significantly behind on payments.

Why Would a Seller Want to Negotiate a Short Sale?

Falling onto difficult financial times is a stressful situation for anyone, particularly when they are faced with the prospect of losing their home. For those sellers who have realized that there is no way that they can catch up with their mortgage payments, a short sale can provide them with a good way to get out from beneath the loan without owing more money. Unfortunately, a short sale will still result in a negative mark on the seller's credit history. At the same time, a short sale will cause less damage than a foreclosure. Therefore, owners who negotiate short sales can turn over their homes in a far less traumatic way while also lessening the damage to their credit scores.

Why Would a Buyer Want to Purchase a Home Through a Short Sale?

Although purchasing a home through a short sale does require jumping through a few extra hurdles and completing some additional paperwork, those who are willing to go through the trouble can get a great deal on a home when purchasing it through a short sale. In addition, they are less likely to run into the problems that are associated with purchasing a home that is in foreclosure, such as damage to the property due to owner sabotage or vandalism because the home has set vacant for a period of time.