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How Does a Short Sale Work

How does a short sale work is one of the most common questions people ask. As more people face foreclosure, the need for short selling has increased. This strategy allows mortgagors the option to sell their home for less than owed on their home loan. However, short selling can lead to additional financial problems if not properly orchestrated.

In order to understand how does a short sale work, borrowers should contact their bank's loss mitigation department. Each banks' short sale policies can differ, but all require bank approval before listing the property for sale at a discounted rate

Borrowers must show extreme financial hardship in order to obtain short sale approval. In most cases, borrowers must be at least 31 days delinquent on mortgage payments. However, if borrowers have extenuating circumstances that prevent them from remaining in their home, banks sometimes allow borrowers who are current on loan payments to apply for real estate short sales.

Properties that are undergoing the foreclosure process are usually not permitted to enter into short sale contracts. Therefore, it is imperative for borrowers to be proactive in their attempts to obtain lender approval to short sell their home. Mortgage lenders can commence with foreclosure proceedings once mortgagors become 31 days late with payments. Most give borrowers two or three months to cure mortgage arrears, but some lenders do not offer any leeway.

Banks typically attempt to provide mortgage relief options before offering the option to short sell. The most common mortgage default remedies include loan deferment, loan modification, and mortgage forbearance.

Real estate short sale literally means the property is sold 'short' of the outstanding balance. Many mortgage lenders hold borrowers responsible for future liability to cover monetary deficiency between the purchase price and loan balance.

The goal of entering into short sale contracts is to limit financial liability. Borrowers should strive to negotiate a 'Payment in Full' agreement which means banks accept the purchase price as payment in full toward the mortgage note.

Many borrowers who enter into short sale contracts find hiring a real estate attorney to be beneficial. Although it can be costly to retain a lawyer, the costs of deficiency amounts far outweigh attorney fees. Short sale deficiency amounts are generally several thousand dollars and can take years to repay.

Banks generally require borrowers to locate a qualified buyer prior to granting short sale approval. One option for locating a buyer is to scout out investors who buy homes with cash. A large percentage of real estate investors possess experience in negotiating real estate short sales. When real estate is purchased with cash the closing process can be expedited; allowing borrowers to quickly commence with credit repair strategies.

Real estate short sales have an adverse affect on borrowers' credit and often decreases credit scores by 100 points or more. Credit bureaus perceive short sales as foreclosure, which limits debtors' ability to obtain credit in the future.

If banks persue borrowers for deficiency amounts they can obtain a creditor judgment and persue collection through wage garnishment. If borrowers cannot obtain Payment in Full short sale agreements, they should become proactive in establishing a payment plan to prevent having wages garnished.

We encourage you to learn more about how does a short sale work by perusing our real estate short sale article library. We offer a vast selection of articles to help borrowers make informed choices and locate necessary resources to obtain a successful short sale outcome. Take a moment to subscribe to our mailing list to receive notification when new real estate articles are published.

Last, but not least, individuals facing foreclosure may benefit from the information provided in my book, Short Sale Hardship Letter eBook Course. The course provides step-by-step instructions for working with bank loss mitigation, along with details for writing a short sale hardship letter. This book is a must-have for anyone attempting to negotiate a short sale. Buy your copy today at

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Published on September 13, 2010 at 02:59 AM

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