Wikipedia defines a short sale as the following,
“A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency”
A short sale comes by as an assured relief, whereby you can sell your home to someone at a price lower than the mortgage balance (or, less than the loan balance).
First: let’s start off with the very simple fact that if the 1st mortgage forecloses the borrower remains liable for the 2nd mortgage. Yes, the 2nd loses their security interest in the property, but they have not given up any rights to collect the debt from the borrower themselves. And in states that allow deficiency judgment’s even on the foreclosed loan a short sale can save the borrower from years of debt collectors and potentially even bankruptcy.
Second: Fannie Mae will lend to someone who has had a short sale (pre-foreclosure) after 2 years versus 5 years if someone has had a foreclosure. This is really good news for homeowners who have a tough situation with their housing who choose a Short Sale vs. Foreclosure (https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf). By negotiating a short sale, the borrower can be confident that this is completely behind them aside from a lower credit rating.
There is an argument that a Short Sale, Deed in Lieu, or Foreclosure all have the same credit rating but note that if you are doing a short sale or deed-in-lieu this can be negotiated – it is the lenders choice as what to report to the credit bureau. Similarly the right for the lender to pursue a deficiency judgment can be negotiated (when the lender has the right to pursue one). Based on those two facts it is ALWAYS better for the homeowner to remain at the table and try to get a short sale done
I am knowledgeable in the short sale process and can explain it clearly to you. There are benefits and drawbacks; sometimes the process is lengthy, but that is usually because it takes a while to find the right buyer. The benefits are many, you avoid foreclosure, and while your credit is damaged, it most likely will not be completely ruined. Remember that the short sale process can be made much quicker when you have a savvy Realtor® to help. Avoiding foreclosure at all costs is what you want to do. It is an ugly procedure that ends with your credit being totally destroyed.
Benefits of a Short Sale; Retain some dignity in knowing that you sold your home, you won’t suffer the social stigma of the “F” word: foreclosure, No mortgage payments to make, unless you choose to make them, You can meet the new owners, you will be eligible, under Fannie Mae guidelines, to buy another home in 2 years instead of 5 to 7 years, If your credit report does not reflect a 60-day+ late pay, under Fannie Mae guidelines, you will be eligible to buy another home immediately.
For a buyer, a short sale is a boom since he or she is getting a property at a reduced price. However, the process of waiting for a lender to decide whether to agree to a short sale can make a lengthy home-buying process longer and more arduous. That’s is why it is so important to pick the right agent, it can mean the difference between getting the home of your dreams or six months of waiting, stressing, and missing out on real deals all to end up where you started. Make sure your agent has handled at least a few short sales, and or has REO experience.
Whether you’ve become aware of the distressed situation on a property through an agent, a FSBO ad or word-of-mouth, this is not a do-it-yourself project. A short sale is one real estate deal where you really need to get help from an experienced team.
Lenders are painfully aware of just how bad the current foreclosure crisis is. They know the cold reality is that a large number of struggling borrowers will end up losing their homes and often see the advisability in accepting the inevitable and trying to minimize their losses. A thing to remember is to keep looking at other houses while you wait for a response, and you should probably proceed with the purchase of another property if you find an easier buy.
While a short sale can be an effective relief for a homeowner facing foreclosure, it can also benefit lenders. Believe it or not, property foreclosure is not only a hardship for the homeowner, but for the lending bank as well. The homeowner has to deal with the reality of losing their home and the financial worries that ensues and the banks must find a way to recover as much of its losses as possible. Banks do not want to own homes. They are not in the real estate business, and foreclosing on a home only adds more to their workload.
The lender has to carry out the entire foreclosure procedure and legal proceedings, bear all the expenses related to a successful auction, refurbish the property and make it suitable for sale, and find the right buyer that will offer the closest amount to the value of the home. Sometimes lenders aren’t able to find a buyer for the home, and so they lose even more money with the property sitting as dead weight. The answer to this problem is a property short sale.
Unlike foreclosure proceedings, a short sale does not involve any additional fees for closing. Both the lender and borrower are not required to pay for refurbishment fees, nor the legal fees that come with a foreclosure. If a buyer can be found, there is no need to put the house on the market or go through a foreclosure auction, saving both time and money. Most of the time, lenders will receive a much closer to market price offer than they would if they had gone through the auction process.