What is a Short Sale?

Short Sale

What is a short sale?

“Short Sales” are being negotiated now more than ever before. So, what exactly is a short sale?

As defined by the National Association Of Realtors®, a short sale is a transaction in which the lender(s) agree to accept less than the mortgage amount owed by the current homeowner. In some cases, the difference is forgiven by the lender, and in others the homeowner must make arrangements with the lender to settle the remainder of the debt. Often, a second mortgage company, a financing company and/or a judgment creditor will also have to agree to take less, or nothing at all, to release their lien(s).

These negotiations are an agreement to take less money, but also an agreement to release the liens IN THE LAND RECORDS after closing. The “after closing” part is where the risk lies. It is normal for liens to be released “after closing”. Just because they agree to make the release does not mean that it always happens, or happens effortlessly. If you are purchasing from a seller that is doing a short sale, you should buy owner’s title insurance as protection against someone dropping the ball. Most motivation goes away after closing; especially if a party got “shorted” in the money they were owed.

The recent economic crisis has caused a surge in short sales. This rise can be attributed to many factors including but not limited to:

  • Rise in unemployment numbers
  • Aggressive borrowing against owned homes in the days of easy credit, and
  • A general drop in home prices across the nation

LENDERS are open to this idea of short sales as it generally costs the lender less than a “foreclosure”, and hence can be a viable way for a lender to minimize its overall losses.

HOMEBUYERS can also benefit from a short sale especially when they are “upside down” on mortgages – a short sale may not hurt their credit history as much as a foreclosure. As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.

Short Sale Advantages

Short sales appear on your credit report as “pre-foreclosure in redemption”, not as “debt discharged due to foreclosure” – less impact on your credit score.

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Source: Dual upside to foreclosure alternative, (The Early Show (CBS), June 21, 2007).

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