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Short Sale Explained
1. A short sale is a real estate transaction where proceeds obtained from the sale of a property fall short of the balance owned on the property’s mortgage or loan schedule.
2. Short sales occur when a borrower cannot meet the repayment obligations demanded by the mortgage schedule on the attached property. In these instances, the lender will decide that selling the property at a moderate loss is more beneficial than pursuing or pressing the borrower.
3. Both parties must consent to the transaction for a short sale to take place. A short sale agreement istypically beneficial because it allows each party to avoid foreclosure and the negative aspects attached to the process; including, bank fees and poor credit listings for the borrowers.
4. That being said, a short sale does not necessarily release the borrower from the mortgage obligation.
Short Sale Process
1. The mortgage lender, in a short sale transaction, will agree to discount the loan balance because of a financial hardship or economic problem realized by the borrower.
2. The debtor or home owner will then sell the mortgaged property for less than the outstanding debt attached and subsequently turn over the proceeds to the lender.
3. Although neither side directly benefits from the transaction, a short sale is considered the most viable solution because it avoids a foreclosure; the bank will incur a smaller financial loss than what would result from a continued non-payment or a foreclosure of the property. In turn, borrowers are able to mitigate damage in regards to their credit history; their debts are partially controlled and their credit report will not reveal a foreclosure.
4. A short sale is also considerably faster and less expensive than alternative liquidation agreements, such as bankruptcy. That being said, the short sale agreement does not eliminate the remaining balance of the mortgage agreement unless the debt is settled or clearly indicated on an acceptance offer.
5. To evaluate the benefits of a short sale agreement the underlying lending institution will often incorporate loss mitigation departments to evaluate the particulars of the short sale agreement. Loss mitigation departments have pre-determined criteria that will regulate and evaluate such transactions; however, these institutions are open to offers and willingness to accept a short sale is dependent on circumstance and particular situation.
6. When the short sale is agreed upon, a bank will determine the amount of equity by analyzing the probable selling price—typically achieved through the evaluation of an appraisal, a broker’s opinion of value, or a broker price opinion.
7. Lenders may accept short sale agreements even if a Notice of Default has not been recorded. As a result of the overwhelming number of losses that mortgage lenders have recently incurred—through the presence of increased defaults—lending institutions are more willing to accept short sales.