What is a “short sale”?


A short sale takes place when a seller is “underwater” thus owes more on the home than it is worth. If that seller were to sell his/her home at current market value they would have to bring money to closing. If the seller cannot afford to bring the money to closing they can try to negotiate a short sale with their bank.

An example of a short sale situation would be if an owner of a home owed $150,000 on their mortgage, but the home is only worth $120,000. To sell this home the seller would have to bring to closing the difference between what the home sold for and the mortgage owed plus any Realtor fees, closing costs and transfer taxes. If the seller could not do this, they can try to negotiate a short sale with the bank that services their mortgage.

The seller has to begin negotiations with the bank to prove that they are in hardship situation and cannot afford to bring the money to the closing table. A great way to start is by getting a purchase offer from a perspective buyer. This way the bank knows what kind of money they will lose on shorting the payoff on the mortgage. The bank will ask the seller to put together a hardship letter explaining their circumstances behind selling the home. The bank will also want to review their financial well being by looking at the seller’s income and assets. The bank will also need to do a market analysis on the property to make sure that the offer is at market value. This process may take a couple of months because the bank will be taking a significant loss on the property and they have to do their due diligence.

A short sale may be a long and arduous process, but is a much better alternative than a bankruptcy or foreclosure on your credit report. A short sale simply shows up on a credit report as an account that is settled for less than full. If there are missed payments leading up to the short sale that will hurt the customers credit score even more.

Currently, conventional mortgage guidelines state that a borrower will not be able to get financing for 5 years after a foreclosure and 2 years after a Chapter 7 bankruptcy. FHA/VA guidelines are three years for financing after a foreclosure and 2 years after a bankruptcy.

A short sale however, does not have a time frame associated with it. You could technically get financing immediately as long as you qualify. If you are missing payments than a good rule of thumb would be to wait about a year after the last missed payment, and with a good reestablishment of credit you could get financing on either a conventional or FHA/VA mortgage.

Please call with any questions, Joseph Bigelman 248-813-4925