In real estate, a short sale occurs when homeowners are in financial distress and need to sell their property for less than the amount due on their mortgage loan.
For example, Mr. and Mrs. Jones borrowed $175,000 to purchase a home five years ago. The home was appraised at $200,000 at the time they bought the home. Then, Mr. Jones lost his job and the Jones failed to make payments on their mortgage. Upon reviewing a Comparative Market Analysis or CMA to determine the value of their property, they discover that the value dropped to $150,000. Mr. and Mrs. Jones want to sell their home before the bank foreclosures on them. To complete the short sale, the Jones work with the lender to get approval to sell their home for its current market value of $150,000 and provide documents of their hardship and financial proof that they cannot keep up on their mortgage payments. When the home sells, the bank gets less than the full amount the Jones originally borrowed; in most cases, however the lender will consider their mortgage paid in full. This benefits all parties, the borrowers – Mr. and Mrs. Jones – because their credit will not be impacted as much as if the bank had foreclosed; and the bank will avoid expensive and time-consuming foreclosure or repossession of the property and need to re-sell it.
In Idaho, as well as in other states, a short sale process is not a short-term, quick process. To complete a short sale requires a lot of patience, because it can take up to 4 to 6 months to get a response from the lender with no guarantee of approval. Here are the basic steps in the process that we mentioned in our example with the Jones.
- The homeowner or seller receives an offer and agrees to the terms of the purchase and sale agreement.
- The offer is submitted to the lender for approval of all terms and conditions – the process may take longer if there is more than one lender or if any mortgage insurance companies are involved.
- The buyer performs due diligence, including a thorough Comparative Market Analysis of the recent sold homes in the area to validate the market value and any inspections to check the current property condition. Then the buyer should be ready to close quickly once the lender approves.
- In most cases, property is sold in “AS-IS” condition, meaning all repairs and other expenses will be the responsibility of the buyer. Any issues or possible repairs should have been considered in the offer price.
- Once sold, the short sale process is completed and ownership or title has legally transferred and is no longer the obligation of the homeowner or seller.
A short sale process is considered a win-win situation if all parties agree to the terms and have a smooth transaction. The advantage of short sale is that the home owner will not face ruined credit and can usually qualify for another home purchase in less time than with a foreclosure or bankruptcy in their credit history.