Those who purchase a home tend to do so in hopes that they’ll build equity on that home. The unfortunate fact is that, sometimes, things don’t go that way.
Homeowners who must default on their mortgage or need to sell in a hurry face a difficult decision. One option available to them is a short sale on a house, which can provide relief.
We’re going to look at what a real estate short sale is today, giving you some insight into the process and when to use it. Let’s get started.
Understanding a Short Sale on a House
A short sale occurs when the homeowner sells their home for less than the value of the mortgage.
This situation occurs if the house has either depreciated, the homeowner recently refinanced, or some other situation occurred and dipped the value of the home. Under normal circumstances, the individual would wait for the market to change and the value of the house to rise.
There’s always something pressing the individual to sell when a short sale is on the table. It could be the case that they’re unable to pay their mortgage bills. It could also be some punitive measure from the bank or a municipality that’s owed money.
In any case, nobody wants to sell their house and leave the situation with an unpaid mortgage. If the individual can’t pay their mortgage anyway, though, why would they use a short sale?
The Bank Often Forgives The Difference
The appealing thing about this situation is that the bank has the option to forgive the difference between the mortgage and home value.
By taking the home and swallowing the difference, the bank still manages to get a pretty good deal. Owning that home and selling it back on the market after a period of time will leave the lender with a positive return on investment.
In some cases, that return will be more than the interest the homeowner would have paid on their house. Further, the bank could dish out more money with litigation and other factors involved with the foreclosure process. There are also renter’s rights and squatting situations that lenders want to avoid.
So, taking the house back as collateral for the loan even though the value is insufficient works out in the bank’s favor.
Short Sale vs. Foreclosure
In these situations, the two outcomes are either foreclosures or short sales.
In the case of foreclosures, matters are taken more into the hands of the lender. An individual misses mortgage payments, gets a notice from the lender, enters the pre-foreclosure phase, and the house gets auctioned.
That process takes around eight months from start to finish. Throughout that time, there are opportunities for the individual to make different arrangements with the bank and extend or amend the foreclosure.
That said, people going through this process tend to be in difficult financial situations. If the home has equity and the individual doesn’t sell, they lose that equity through the foreclosure process.
Most people in those situations either refinance or sell their house to make good on the mortgage payments or leave with some money. If the individual can’t tie the situation together, though, a short sale tends to be the best option.
Foreclosures do a lot of harm to one’s credit and take a lot of control out of the homeowner’s hands. Many handle the process in different ways that don’t seem rational as well.
In situations like these, though, people are hanging on in order to try and save their homes. The financial consequences are secondary to the idea of keeping their children in a comfortable place, for example.
In that spirit, there are a lot of options people can use to save their home or extend the process of foreclosure while they get on their feet.
Why Wouldn’t You Choose a Home Short Sale?
Although short sales are a viable option, many people still go into foreclosure. Why is that?
For one, there are a lot of instances where the bank refuses to pay the difference. Depending on your situation, the value of your home might be too low to justify taking the hit in the short sale. There might be legal consequences in those situations if you refuse to pay or make arrangements to pay.
In other situations, it might make more sense for you to file bankruptcy and try to salvage your house. There are a couple of different forms of bankruptcy to use in these situations.
Chapter 7 bankruptcy allows you to stop the foreclosure for a period of time, and the bank takes your other assets instead of mortgage payments. While that doesn’t sound like a pleasant thing to go through, sometimes it’s more reasonable to do that than go into foreclosure or sell your home.
Chapter 13 bankruptcy helps you save your home through renegotiation. You get a different agreement on the loan and have a different payment plan. This is an option to help you afford smaller loan payments and get back onto your feet without moving.
The Buyer’s Perspective
If you’re looking to buy a home, homes that have been through a short sale are good options.
Naturally, it’s difficult to think about the circumstances that put the home on the market. That said, short sales and foreclosures are opportunities for new homeowners to purchase a home and start building equity for themselves.
The homes tend to go on the market at a lower price than the market demands. That means the buyer gets a good deal and the market value increases to build a lot of equity. You can learn more about foreclosed and distressed properties for sale.
Want to Learn More About Financial Terms?
Hopefully, you have a better idea of what a short sale on a house is. There are a lot of different situations that make short sales more complicated, though.
There’s more to learn, and we’re here to help you wrap your head around it. Explore this site for more ideas on property short sale situations and how to handle them.
