The Pros and Cons of Short Sale Homes

  • 07/31/18

The loss of a job, unforeseen medical or other large expenses, or divorce–these are all situations that can affect a person’s income and ability to pay back a loan.

Also, housing markets fluctuate and the value of a home may drop due to circumstances beyond your control. As a result, your home may be worth less than what you owe on it.

If you’re a distressed borrower and it looks like you won’t be able to make mortgage payments in the very near future, selling your home as a short sale might be a better option than foreclosure. It sounds like a good plan. But is it?

Read on to learn about the pros and cons of short sale homes. This guide can help you make an informed decision about how to sell your home and pay off a mortgage.

What is a Short Sale?

A short sale is when a person sells their home for less than what is owed. This option is used to avoid foreclosure. The main difference between a short sale and foreclosure is ownership.

With a short sale, you still maintain ownership of your home until it is sold. With a foreclosure, the homeowners have abandoned the home and stopped making mortgage payments to the bank. The bank takes over and sells the home to get back the money that they lent for the purchase of the home.

Short sale homes can only be sold with the permission of the lender, who must agree to the sale at the lower price. However, they may see it as a more viable option than the costs of the foreclosure process.

Benefits of a Short Sale to the Seller

Selling one’s home sometimes is a person’s only option. If you’re a distressed borrower and there is no possible way to continue making mortgage payments every month, this can be a good option.

A short sale will affect your credit rating, but not as much as a foreclosure. Also, if you plan on buying another home, the wait-time for regaining eligible credit is about two years versus seven years if you go into foreclosure. Lenders see a short sale as a far more responsible action than foreclosure.

Downsides of a Short Sale

As mentioned, selling short sale homes can affect your credit by well over 100 points. The impact on your credit initially is the close to a foreclosure.

Some states allow lenders to attempt to regain the loss from the short sale of a home. Therefore, if you think you’re out of the woods, you may not be. The lender could still require you to pay the difference and that payment could impact you financially for a number of years. If they forgive you the difference in debt, then there may still be another financial impact.

You may need to pay taxes on the forgiven debt. This type of debt is seen as income by the federal government, hence the reason you may have a tax issue.

Pros and Cons of a Short Sale to the Lender

In short, the lender benefits from a guarantee of getting a portion of their money back. The lender also has the final decision on approving the short sale. The seller is responsible for providing proof and documentation of the need for a short sale.

This decision is based on whether the lender believes they can get more money from a short sale versus a foreclosure.

The bottom line is that the lender would rather get some money back than none. The process is not as lengthy or as costly as a foreclosure.

The obvious downside is that the lender will get less money from a short sale then if the mortgage is paid off in full. However, most lenders understand that things happen. People do undergo hardships and markets fluctuate.

Pros and Cons of a Short Sale to the Buyer

Most of the time, short sale homes mean a good deal for a prospective buyer. The seller is in a desperate situation and wants to sell the home quickly without going into foreclosure. Often the price of the home is below market value.

However, this is not always the case. It’s important to do your research before buying a short sale home. Make sure that the price is indeed a good deal.

Also, verify that the lender has approved the short sale before making an offer. Sometimes the seller listed the price before approval in hopes that the offered price will be what the lender accepts.

Wrapping Up: Short Sale Homes

Selling your home in a short sale can be a better option than foreclosure if you want to purchase a new home sooner rather than later. It should only be a last resort as it can negatively impact your credit score.

Also, if you’re wondering how long a short sale takes, it can be a long time. Some lenders take their time responding to a request for a short sale. The wait can be several months, which obviously has financial implications.

The transaction is also complex and the paperwork is vast. Hiring a real estate agent who is experienced with short sales will give you the ability to make sure the transaction is done right.

For more articles about selling or buying your home on Staten Island, visit our blog.

Wonica Realtors & Appraisers are Staten Island’s #1 independent full-service real estate firm, serving the needs of the community for over 30 years. Whether you’re buying, selling, renting or relocating, our staff of highly trained professionals will provide quality realty services with personal attention to your individual real estate needs.

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