How does a short sale work? Let’s define a short sale. Short sales are when lenders are willing to take less than is owed on a property due to owner economic and market conditions.
A bank will not approve a short sale for anybody. There are some conditions that must be met first.
- The owner of the property must be behind on their mortgage payments.
- The owner must have economic hardship (they can’t afford the payments anymore)
- The current market value of the home must be less than the amount owed on the home.
Banks all have their own criteria that they follow, but the above list represents the basic criteria all banks use. Even if a seller meets the above requirements, it still does not guarantee the bank will allow a short sale.
Banks that are struggling will often do all they legally can to collect all of the money that is owed. This often results in the bank losing more than they would have lost with a short sale, but you can’t blame them for trying.
There is a misconception about short sales that since it is not a foreclosure the owner’s credit will not be damaged. This is not true. The owner’s credit will suffer and they will not be able to get another mortgage for at least two years.
Other false information many borrowers are given by real estate agents in an effort to secure the listing is that they will not be responsible for the difference in what was owed and the amount the bank collected through the sale of the home.
The owner will be obligated to pay the difference unless the bank agrees in writing to forgive them of the responsibility.