A short sale is
the process by which a homeowner can sell a house for less money than he
actually owes on the mortgage(s). This is done by the seller and the listing
agent providing proper documentation to the mortgage lender(s) to convince them
to reduce the mortgage balance to allow the sale. The mortgage lender (or bank)
actually takes a loss (or write-off) on the mortgage because the value of the
home has fallen below the mortgage balance AND the homeowner is in a poor
financial condition that will not allow him to continue to pay on time.
If the bank approves the discount on the mortgage, the home
can be sold for a lower price without the seller having to come up with cash to
cover the shortfall, and the mortgage is satisfied and the foreclosure process
stops.
Most short sales are done on properties in foreclosure. This means the homeowner is at least 3 payments behind and the foreclosure suit has been filed by one of the mortgage lenders. Recently, more mortgages that are simply behind or "in default" are considered short sale candidates without actually being in foreclosure.
Also, the homeowner typically has negative equity or no equity in the
home. In other words, the total balance owed on the mortgages is equal or
greater than the price at which the house can be sold. This situation is
growing increasingly common due to the easy availability of 100% mortgages (no
money down) as well as the recent decline in prices. This is particularly
prevalent in the Southern California area, which has a large glut of homes for
sale and where prices have declined 10%-30% in the past year.
In addition, the homeowner must have some type of financial
hardship that is preventing him from paying the mortgage. This is commonly job
loss, medical bills, disability, or some other hardship.
A typical situation for a short sale is this:
-Homeowner purchases a home for $600,000 in 2004 with 5% down payment, the
mortgage balance is $570,000.
- By 2005, the home's
value has increased and interest rates have declined so the homeowner
refinances to pull cash out. Home value $660,000, new mortgage $660,000.
- In 2006, homeowner gets laid off and continues to make
payments from savings, hoping to land a new job soon.
-
By 2007, savings are gone and still no job. Homeowner begins to miss payments
and decides to sell the home for $660,000.
-As the
months pass, the home has not sold because values have dropped back to $600,000
and the foreclosure process has begun. The Real Estate Agent presses to lower
the selling price to entice a buyer, however that would require the homeowner
to come up with cash at closing to cover the mortgage shortfall.
-Homeowner is stuck in the house and the foreclosure is
proceeding.
If your situation sounds at all like this
one, you might benefit from a short sale, Call Fred Sed at
949-274-3733.
