If you're out in the real estate market these days looking to buy a home, a term you're going to come across quite often is "short sale." To most people that aren't familiar with the term, this sounds like a sale that needs to get done quickly because the owners need to get out of their mortgage due to financial hardships. However, there are several popular misconceptions that currently exist regarding short sales.
It's easy to get confused with all of the real estate and financial terminology that typically gets thrown around when discussing things like short sales and foreclosures. Read on to learn more about short sales and how they work.
How short sales work
"Short sale" is one of those real estate terms that you might frequently hear about in conversation, but aren't exactly clear on the precise meaning. Don't worry, you're not alone.
In a short sale, the sale of the home and its proceeds will fall short of the amount of money that is still owed on the house. For whatever reason, usually financial hardship, the owners cannot come up with the "deficiency" -- the amount of unpaid debt owed to the creditors -- and are choosing a short sale to recover some of the money that is owed on their mortgage. The problem this creates is the sale often has to be approved by a third-party, usually the bank serving as the primary lender on the mortgage.
Common misconceptions about short sales
Here are some of the most common misconceptions about short sales that may mislead people who are looking to buy a home:
- Short sales are done quickly and might be an attractive option for buyers who want to close as soon as possible. If you've talked to your real estate agent about it, you'll quickly find out that this is most certainly not the case. In fact, many real estate agents refer to short sales as "long sales" because of how long it typically takes for these types of home sales to close. On average, the timeframe for a short sale can be anywhere from a few weeks to a few months.
- They are a prelude to foreclosures. This is incorrect, as short sales are simply an alternative to foreclosures and they are not directly related in any way. Short sales are less harmful to the homeowner's credit than foreclosures.
- The sellers must default on their mortgage before the bank will approve a short sale. This widely-held notion is untrue. The sellers need not default on their mortgage in order to qualify for a short sale - in fact, they can make all of their mortgage payments on time and still be able to qualify. Here is what banks typically take into consideration when approving a short sale:
- Seller's hardship: The financial situation of the sellers and whether they have had any difficulty with monthly mortgage payments, even if they have not yet fallen behind.
- Value of the home: What the home is currently worth when it is placed on the market, based on a third-party appraisal.
- The amount still owed on the home: The amount of money that the sellers owe the bank for the home, particularly if it exceeds the current appraised value of the home.
Is a short sale right for you?
Short sales can be beneficial for homebuyers who are willing to deal with the added work that is required by having the sale conducted mostly through a third-party. Here is an outline of the typical short sale process:
- The lender must acknowledge receipt of the short sale package, which includes all of the seller's documents and related real estate items, as well as the buyer's short sale offer. This process can take 7-10 days to complete.
- A negotiator will be assigned, and an official appraisal will be conducted by the lender, which can take up to 45 days.
- The bank and the investors will undergo a review and approve the short sale, which can take anywhere from 2-3 weeks.
Because banks typically have a lot of short sales to work through, it may take up to two or three months - sometimes longer - for the sale to be approved. It's for this reason that many prospective homebuyers tend to stay away from short sales if they are in a hurry to move out. However, if you're not in a rush and you have some time to spare, short sales can be great because they'll often present you with an opportunity to buy a home at a discounted price from what you might normally find in that particular area.
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