What is a short sale and how is it connected to the foreclosure process?
The term short sale has been mentioned more and more in the real estate world as the real estate market has corrected itself to a more sustainable level of growth. The depreciation of home values in recent years has led to homes being worth less than the mortgages that were used to finance the purchase. This situation, coupled with a nationwide recession that has created a need for people to sell their homes despite being “underwater,” has led to the recent popularity of short sales.
What is an underwater loan?
A home loan or mortgage that is higher than the home’s actual value is said to be underwater. In recent years, this situation has become commonplace, as homeowners who bought at peak home prices with little or no down payment have seen their property values decline, sometimes dramatically. dramatic. They started out with a $300,000 loan on a home that was appraised around that value, and now their mortgage amount is about the same, but that same house is appraised for less than $250,000.
With unemployment on the rise, many homeowners in this difficult situation have been forced to sell their home because they can no longer afford the mortgage. The problem that occurs is that even if the owner were to sell his house for $250,000, he would still owe the bank the additional $50,000, which delays the sale process. This hurts everyone involved because the original owners can’t pay the mortgage, so they default on the loan. New buyers who are excited about the house cannot buy it at the new market price. Ultimately, the bank that holds the mortgage won’t let the original owner sell, doesn’t get a mortgage payment each month, and must now go through a costly and time-consuming foreclosure process to take possession of a home that they will only be able to sell for least anyway.
Buying and selling a house with a short sale
This is where the short sale comes into play. In a short sale, the original owner of the underwater home will obtain an agreement from the bank to complete a short sale and put their home on the market at the current local price. When a buyer decides to buy the house, the bank agrees to let the sale go through and take a loss on the original mortgage. Ultimately, this type of legal agreement allows the homeowner and the bank to avoid a costly and credit-damaging foreclosure process. The homeowner will still take a hit to their credit score and the bank will lose some money on the transaction, but the overall solution is much better than foreclosure on the house.
Foreclosures and Short Sales
Short sales are becoming more common with our current correction in home prices and high unemployment, but many bands still make the process difficult for homeowners because they don’t want to lose out on the loan. For this reason, many banks will not consider a short sale option until homeowners are already several months behind on their mortgage. In addition, the banks reserve the right not to accept the price that the new buyer offers for the home if they consider it too low. This creates tension between all parties involved and, if not resolved, leads to the eventual foreclosure of the home.
