Price Too Good to be True? Understanding a Short Sale
Before 2005 most people weren’t aware of what a short sale was, in fact if you are one of the many who don’t know what it is, you’re not alone. There are lots of opinions on short sales, some people will tell you that they are great deals while others will bend over backwards to tell you to steer clear of them! Simply put, a short sale can be an extremely complicated process, don’t be confused by the name, a short sale is never a short process, let’s have a closer look at some of the reasons why.
What is a Short Sale?
A short sale is when the lender is willing to accept less than the amount that is still owed on a mortgage. For a sale to actually be considered a short sale, there are two factors that must qualify as being true:
- The homeowner must be so far behind on their mortgage payments that they are unable to catch up.
- The market is down so much that the house is worth less than the remaining balance is on their mortgage.
The lender and homeowner will typically agree to attempt a short sale process when trying to avoid going into foreclosure and in some cases, it is the best option. While many short sales involve a home that is in foreclosure, not every short sale is a pending foreclosure and not every lender requires a short sale seller to stop making mortgage payments, some can actually qualify without being behind on payments; they also look at the bigger picture and determine if a projected default on payments is inevitable or not and make a decision from there. In fact, most don’t want to stop making payments as it will greatly impact their credit score.
Why are Short Sales so Complicated?
One of the most common misconceptions around short sales is that the lenders just want to get off the property and get as much money back as they possibly can, this is actually not the case as the lender will actually take as much time as need to recover as much money as they can. Remember; just because a property is listed as being a short sale does not mean that they are going to take the first offer and run, even if the seller accepts it, the lender does not have to which is what makes the short sale process so complicated.
Did you know that if the homeowner files for bankruptcy, then they are automatically disqualified for a short sale, because a short sale is considered as a means of collecting a debt which is not allowed in bankruptcy.
Whats the Difference Between a Short Sale and Foreclosure?
With the short sale process the homeowner is in control and initiates the process. The home must be worth less than what is owed, and they have to be so far behind on their mortgage payments that they simply cannot catch up.
Buyers will work with the home sellers, but all the details and a sale must first be approved by the lender. In fact, because everything is dependent on the lender the process can be unpredictable and quite long even if both the homeowner and the lender agree on all terms.
In a foreclosure situation the bank takes ownership of the home after the homeowner is no longer able to make payments. This process is initiated by the lender and the force the sale of the home in order to try and recover as much and as close as they can to the original loan.
Foreclosed homes are typically abandoned but in some cases the homeowner is still occupying the home, which can make for further complicated process as the lender then has to initiate an eviction. A foreclosed property can be sold at auction or by means of a traditional real estate agent.
Foreclosures typically take less time than a short sale as the lender simply wants off the property as quickly as they can.
For homeowners a short sale is usually preferred as it’s a voluntary process, while a foreclosure is a forced process and having gone into foreclosure will damage your chances of being able to qualify for another mortgage in the future. There is a standard 7 year waiting period before being able to obtain a second mortgage while a short sale may have you wait for up to two years.
Things to Consider Before Buying a Short Sale:
You will more than likely have to purchase the house as-is! The lender is in control so its pretty unlikely that they will agree to any extra terms such as closing costs or requested repairs. Always get an inspection, anyway, even though they may not agree to repairs it’s best to know what you’re in for.
The timeline will be a long and unpredictable one at best. Remember, the lender has the wheel, so it could take weeks or even months before you know that your offer has even been accepted. There is simply no real way to know how long the process will take.
In conclusion, understand that the lender is calling the shots, do your homework and work closely with your Real Estate agent to ensure that the proper investigative work is done on the property before making an offer. Partner up with the right Real Estate agent to ensure success in your home buying venture. To learn more about the short sale process, give us a call today! MBHomes New England servicing Massachusetts and Connecticut since 2010!